Chapter 17 Test Bank Final Chapter 17 Test Bank Final

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Chapter 17 Test Bank final
Principles of Economics (ESLSCA Business School Paris (Egypt))
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Chapter 17 Oligopoly
MULTIPLE CHOICE
1. Which of the following statements about oligopolies is not correct?

a. An oligopolistic market has only a few sellers.
b. The actions of any one seller can have a large impact on the profits of all other sellers.
c. Oligopolistic firms are interdependent in a way that competitive firms are not.
d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed
their marginal revenues.
ANS: D PTS: 1 DIF: 1 REF: 17-0
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Markets
MSC: Definitional
2. In the language of game theory, a situation in which each person must consider how others might respond to
his or her own actions is called a
a. quantifiable situation.
b. cooperative situation.
c. strategic situation.
d. tactical situation.
ANS: C PTS: 1 DIF: 1 REF: 17-0
NAT: Analytic LOC: Oligopoly TOP: Game theory
MSC: Definitional
3. In general, game theory is the study of

a. how people behave in strategic situations.
b. how people behave when the possible actions of other people are irrelevant.
c. oligopolistic markets.
d. all types of markets, including competitive markets, monopolistic markets, and oligopolistic
markets.
ANS: A PTS: 1 DIF: 2 REF: 17-0
MSC: Definitional
4. Which of the following statements is correct?

a. Strategic situations are more likely to arise when the number of decision-makers is very large rather
than very small.
b. Strategic situations are more likely to arise in monopolistically competitive markets than in
oligopolistic markets.
c. Game theory is useful in understanding certain business decisions, but it is not really applicable to
ordinary games such as chess or tic-tac-toe.
d. Game theory is not necessary for understanding competitive or monopoly markets.
MSC: Interpretive
5. In which of the following markets are strategic interactions among firms most likely to occur?
a. markets to which patent and copyright laws apply
b. the market for piano lessons
c. the market for tennis balls
d. the market for corn
MSC: Interpretive
1
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2 ❖ Chapter 17/Oligopoly
6. Game theory is important for understanding which of the following market types?
a. perfectly competitive and oligopolistic markets
b. perfectly competitive markets but not oligopolistic markets
c. oligoplistic but not perfectly competitive markets
d. neither oligopolistic nor perfectly competitive markets.
MSC: Definitional
7. In choosing among alternative courses of action, Raj must consider how others might respond to the action he
takes. In the language of game theory, we say that Raj must think
a. openly.
b. strategically.
c. dominantly.
d. cooperatively.
ANS: B PTS: 1 DIF: 1 REF: 17-0
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Game theory MSC: Definitional
8. We must be knowledgeable of how people behave in strategic situations if we are to understand

a. perfectly competitive markets.
b. monopolistically competitive markets.
c. oligopolistic markets.
d. All of the above are correct.
NAT: Analytic LOC: Oligopoly TOP: Game theory | Markets
MSC: Interpretive
9. In an oligopoly, each firm knows that its profits

a. depend only on how much output it produces.
b. depend only on how much output its rival firms produce.
c. depend on both how much output it produces and how much output its rival firms produce.
d. will be zero in the long run because of free entry.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Interdependence
MSC: Interpretive
MARKETS WITH ONLY A FEW SELLERS
1. A distinguishing feature of an oligopolistic industry is the tension between

a. profit maximization and cost minimization.
b. cooperation and self interest.
c. producing a small amount of output and charging a price above marginal cost.
d. short-run decisions and long-run decisions.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive
2. In studying oligopolistic markets, economists assume that

a. there is no conflict or tension between cooperation and self-interest.
b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome.
c. each oligopolist cares only about its own profit.
d. strategic decisions do not play a role in such markets.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Cooperation
MSC: Interpretive

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Chapter 17/Oligopoly ❖ 3
3. The simplest type of oligopoly is

a. monopoly.
b. duopoly.
c. monopolistic competition.
d. oligopolistic competition.
NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive
4. A special kind of imperfectly competitive market that has only two firms is called
a. a two-tier competitive structure.
b. an incidental monopoly.
c. a doublet.
d. a duopoly.
NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Definitional
5. An agreement between two duopolists to function as a monopolist usually breaks down because
a. they cannot agree on the price that a monopolist would charge.
b. they cannot agree on the output that a monopolist would produce.
c. each duopolist wants a larger share of the market in order to capture more profit.
d. each duopolist wants to charge a higher price than the monopoly price.
6. An agreement among firms in a market about quantities to produce or prices to charge is called
a. collusion.
b. a strategic situation.
c. excess capacity.
d. tying.
NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Definitional

a. If duopolists successfully collude, then their combined output will be equal to the output that would
be observed if the market were a monopoly.
b. Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it does
not push the duopolists to reach the competitive price.
c. Although the logic of self-interest increases a duopoly’s level of output above the monopoly level,
it does not push the duopolists to reach the competitive level.
8. Suppose that Jay-Z and Beyonce are duopolists in the music industry. In January, they agree to work together
as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs.
By February, each singer is considering breaking the agreement. What would you expect to happen next?
a. Jay-Z and Beyonce will determine that it is in each singer’s best self interest to maintain the
agreement.
b. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price will decrease.
c. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
decrease, and the new equilibrium price will increase.
d. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price also will increase.

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9. As the number of firms in an oligopoly increases, the

a. price approaches marginal cost, and the quantity approaches the socially efficient level.
b. price and quantity approach the monopoly levels.
c. price effect exceeds the output effect.
d. individual firms’ profits increase.
10. If a certain market were a monopoly, then the monopolist would maximize its profit by producing 1,000 units
of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely
if the duopolists successfully collude?
a. Each duopolist produces 1,000 units of output.
b. Each duopolist produces 600 units of output.
c. One duopolist produces 400 units of output and the other produces 600 units of output.
d. One duopolist produces 800 units of output and the other produces 400 units of output.
NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Applicative
Table 17-1
Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking
water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They
bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that
Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals
zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below:
Quantity Price Total Revenue
(in gallons) (and Total Profit)
0 $60 $0
100 55 5,500
200 50 10,000
300 45 13,500
400 40 16,000
500 35 17,500
600 30 18,000
700 25 17,500
800 20 16,000
900 15 13,500
1,000 10 10,000
1,100 5 5,500
1,200 0 0
11. Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water,
what price will they charge?
a. $25
b. $30
c. $35
d. $40
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Monopoly
MSC: Applicative

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how many gallons of water will be produced and sold?
a. 0
b. 500
c. 600
d. 1,200
MSC: Applicative
how much profit will each of them earn?
a. $8,750
b. $9,000
c. $12,000
d. $18,000
MSC: Applicative
14. Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic, how many
gallons of water would be produced and sold?
a. 0
b. 600
c. 900
d. 1,200
NAT: Analytic LOC: Oligopoly TOP: Competitive markets
MSC: Applicative
15. Refer to Table 17-1. What is the socially efficient quantity of water?
a. 0 gallons
b. 600 gallons
c. 900 gallons
d. 1,200 gallons
MSC: Applicative
16. Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic, what price
would be charged?
a. $0
b. $30
c. $40
d. $60
MSC: Applicative
17. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from oper-
ating as a monopoly. What will be the price of water once Rochelle and Alec reach a Nash equilibrium?
a. $15
b. $20
c. $25
d. $30
NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium
MSC: Analytical

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18. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from oper-
ating as a monopoly. How many gallons of water will be produced and sold once Rochelle and Alec reach a
Nash equilibrium?
a. 600
b. 700
c. 800
d. 900
MSC: Analytical
Table 17-2. The table shows the town of Pittsville’s demand schedule for gasoline. For simplicity, assume
the town’s gasoline seller(s) incur no costs in selling gasoline.
Quantity Total Revenue
(in gallons) Price (and total profit)
0 $10 $0
100 9 900
200 8 1,600
300 7 2,100
400 6 2,400
500 5 2,500
600 4 2,400
700 3 2,100
800 2 1,600
900 1 900
1,000 0 0
19. Refer to Table 17-2. If the market for gasoline in Pittsville is perfectly competitive, then the equilibrium price
of gasoline is
a. $8 and the equilibrium quantity is 200 gallons.
b. $5 and the equilibrium quantity is 500 gallons.
c. $2 and the equilibrium quantity is 800 gallons.
d. $0 and the equilibrium quantity is 1,000 gallons.
NAT: Analytic LOC: Perfect competition TOP: Perfect competition
MSC: Applicative
20. Refer to Table 17-2. If the market for gasoline in Pittsville is a monopoly, then the profit-maximizing mo-
nopolist will charge a price of
a. $8 and sell 200 gallons.
b. $5 and sell 500 gallons.
c. $2 and sell 800 gallons.
d. $0 and sell 1,000 gallons.
NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative
21. Refer to Table 17-2. If there are exactly two sellers of gasoline in Pittsville and if they collude, then which of
the following outcomes is most likely?
a. Each seller will sell 500 gallons and charge a price of $5.
b. Each seller will sell 250 gallons and charge a price of $2.50.
c. Each seller will sell 350 gallons and charge a price of $3.
d. Each seller will sell 250 gallons and charge a price of $5.

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22. Refer to Table 17-2. If there are exactly three sellers of gasoline in Pittsville and if they collude, then which
of the following outcomes is most likely?
a. Each seller will sell 166.67 gallons and charge a price of $1.33.
b. Each seller will sell 166.67 gallons and charge a price of $5.
d. Each seller will sell 233.33 gallons and charge a price of $5.
23. Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ. If Exxoff
sells 300 gallons and BQ sells 400 gallons, then
a. Exxoff’s profit is $900 and BQ’s profit is $1,200.
b. Exxoff’s profit is $2,100 and BQ’s profit is $2,400.
c. there is an excess demand for gasoline in Pittsville.
d. there is an excess supply of gasoline in Pittsville.

a. When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly
level of output.
b. When oligopoly firms collude, they are behaving as a cartel.
c. In an oligopoly, self-interest drives the market to the competitive outcome.
d. An oligopoly is an example of monopolistic competition.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Cartels
MSC: Interpretive
25. As the number of firms in an oligopoly increases, the magnitude of the

a. output effect increases.
b. output effect decreases.
c. price effect increases.
d. price effect decreases.
26. As the number of sellers in an oligopoly becomes very large,

a. the quantity of output approaches the socially efficient quantity.
b. the price approaches marginal cost.
c. the price effect is diminished.
27. In markets characterized by oligopoly,

a. the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
b. collusive agreements will always prevail.
c. collective profits are always lower with cartel arrangements than they are without cartel
arrangements.
d. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the
market.
NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive

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28. As a group, oligopolists would always be better off if they would act collectively
a. as if they were each seeking to maximize their own individual profits.
b. in a manner that would prohibit collusive agreements.
c. as a single monopolist.
d. as a single perfectly competitive firm.
29. As a group, oligopolists would always earn the highest profit if they would
a. produce the perfectly competitive quantity of output.
b. produce more than the perfectly competitive quantity of output.
c. charge the same price that a monopolist would charge if the market were a monopoly.
d. operate according to their own individual self-interests.
30. Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists to-
gether,
a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
b. each firm's profit always ends up being zero.
c. society is worse off as a result.
d. Both a and c are correct.
Table 17-3. The information in the table below shows the total demand for premium-channel digital cable TV
subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of
$200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of
providing the premium channel service to a household is zero.
Quantity Price (per year)
0 $180
3,000 $150
6,000 $120
9,000 $ 90
12,000 $ 60
15,000 $ 30
18,000 $ 0
31. Refer to Table 17-3. If there is only one digital cable TV company in this market, what price would it charge
for a premium digital channel subscription to maximize its profit?
a. $30
b. $60
c. $90
d. $150
32. Refer to Table 17-3. Assume there are two digital cable TV companies operating in this market. If they are
able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for sub-
scriptions, then their agreement will stipulate that
a. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.
b. each firm will charge a price of $90 and each firm will sell 9,000 subscriptions.
c. each firm will charge a price of $120 and each firm will sell 3,000 subscriptions.
d. each firm will charge a price of $150 and each firm will sell 1,500 subscriptions.
NAT: Analytic LOC: Oligopoly TOP: Duopoly | Collusion
MSC: Applicative

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33. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on
the price that will be charged for subscriptions. How much profit will each company earn?
a. $610,000
b. $550,000
c. $405,000
d. $205,000
MSC: Applicative
market. Further assume that they are not able to collude on the price and quantity of premium digital channel
subscriptions to sell. How many premium digital channel cable TV subscriptions will be sold altogether when
this market reaches a Nash equilibrium?
a. 6,000
b. 9,000
c. 12,000
d. 15,000
MSC: Applicative
market. Further assume that they are not able to collude on the price and quantity of premium digital channel
subscriptions to sell. What price will premium digital channel cable TV subscriptions be sold at when this
market reaches a Nash equilibrium?
a. $30
b. $60
c. $90
d. $120
MSC: Applicative
36. Refer to Table 17-3. Assume that there are two profit-maximizing digital cable TV companies operating in
this market. Further assume that they are not able to collude on the price and quantity of premium digital
channel subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibri-
um?
a. $25,000
b. $90,000
c. $160,000
d. $215,000
MSC: Applicative

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Table 17-4. The information in the table below shows the total demand for high-speed Internet subscriptions in a
small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost
of $200,000 (per year) and that the marginal cost of providing an additional subscription is always $80.
Quantity Price (per year)
0 $320
2,000 $280
4,000 $240
6,000 $200
8,000 $160
10,000 $120
12,000 $ 80
14,000 $ 40
16,000 $0
37. Refer to Table 17-4. Suppose there is only one high-speed Internet service provider in this market and it seeks
to maximize its profit. The company will
a. sell 6,000 subscriptions and charge a price of $200 for each subscription.
b. sell 8,000 subscriptions and charge a price of $160 for each subscription.
c. sell 10,000 subscriptions and charge a price of $120 for each subscription.
d. sell 12,000 subscriptions and charge a price of $80 for each subscription.
38. Refer to Table 17-4. Assume there are two high-speed Internet service providers that operate in this market. If
they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged
for subscriptions, then their agreement will stipulate that
a. each firm will charge a price of $120 and each firm will sell 5,000 subscriptions.
b. each firm will charge a price of $160 and each firm will sell 4,000 subscriptions.
c. each firm will charge a price of $100 and each firm will sell 3,000 subscriptions.
d. each firm will charge a price of $200 and each firm will sell 3,000 subscriptions.
MSC: Applicative
39. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers operating
in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold
and on the price that will be charged for subscriptions. How much profit will each company earn?
a. $80,000
b. $120,000
c. $160,000
d. $210,000
MSC: Applicative
40. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers operating
in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to
sell. How many subscriptions will be sold altogether when this market reaches a Nash equilibrium?
a. 6,000
b. 8,000
c. 10,000
d. 12,000
MSC: Applicative

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41. Refer to Table 17-4. Assume there are two high-speed Internet service providers operating in this market.
Further assume that they are not able to collude on the price and quantity of subscriptions to sell. What price
will they charge for a subscription when this market reaches a Nash equilibrium?
a. $120
b. $160
c. $200
d. $240
MSC: Applicative
42. Refer to Table 17-4. Assume that there are two profit-maximizing high-speed Internet service providers oper-
ating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions
to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
a. $120,000
b. $150,000
c. $200,000
d. $225,000
MSC: Applicative
Table 17-5. Imagine a small town in which only two residents, Kunal and Naj, own wells that produce safe drinking
water. Each week Kunal and Naj work together to decide how many gallons of water to pump, to bring the
water to town, and to sell it at whatever price the market will bear. Assume Kunal and Naj can pump as much
water as they want without cost so that the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table below.
Weekly Price Weekly
Quantity Total Revenue
(in gallons) (and Total Profit)
0 $12 $0
25 11 275
50 10 500
75 9 675
100 8 800
125 7 875
150 6 900
175 5 875
200 4 800
225 3 675
250 2 500
275 1 275
300 0 0
43. Refer to Table 17-5. Since Kunal and Naj operate as a profit-maximizing monopoly in the market for water,
what price will they charge for water?
a. $2
b. $4
c. $6
d. $7
NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Applicative

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44. Refer to Table 17-5. If the market for water were perfectly competitive instead of monopolistic, how many
gallons of water would be produced and sold?
a. 25
b. 100
c. 200
d. 300
MSC: Applicative
45. Refer to Table 17-5. As long as Kunal and Naj operate as a profit-maximizing monopoly, what will their
combined weekly revenue amount to?
a. $450
b. $675
c. $875
d. $900
46. Refer to Table 17-5. The socially efficient level of water supplied to the market would be
a. 50 gallons.
b. 150 gallons.
c. 225 gallons.
d. 300 gallons.
MSC: Applicative
47. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from operating
as a monopolist. What will the new price of water be once the Nash equilibrium is reached?
a. $3
b. $4
c. $5
d. $6
NAT: Analytic LOC: The role of government TOP: Nash equilibrium
MSC: Applicative
as a monopolist. What will quantity of water will each of them produce once the Nash equilibrium is reached?
a. Each will produce 50 gallons, for a total of 100 gallons.
b. Eacb will produce 75 gallons, for a total of 150 gallons.
c. Each will produce 100 gallons, for a total of 200 gallons.
d. Each will produce 125 gallons, for a total of 250 gallons.
MSC: Applicative
as a monopolist. Once the Nash equilibrium is reached, how much profit will each producer earn?
a. $400.00
b. $437.50
c. $450.00
d. $800.00
MSC: Applicative

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Scenario 17-1. Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume
that both countries have entered into an agreement to maintain certain production levels in order to maximize
profits. In the world market for oil, the demand curve is downward sloping.
50. Refer to Scenario 17-1. The fact that both countries have colluded to earn higher profit shows their desire to
keep their combined level of output
a. above the monopoly level.
b. below the Nash equilibrium level.
c. equal to the Nash equilibrium level.
d. above the Nash equilibrium level.
NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Analytical
51. Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level, both
Irun and Urun have the individual incentive to
a. hold production constant.
b. decrease production.
c. increase production.
d. increase price.
52. Refer to Scenario 17-1. If Irun fails to live up to the production agreement and overproduces, which of the
following statements will be true of Urun's condition?
a. Urun will invariably be worse off than before the agreement was broken.
b. Urun will counter by decreasing its production in order to maintain price stability.
c. Urun's profit will be maximized by holding its production constant.
d. Urun’s profit will be unaffected by Irun’s actions.
53. Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash equilibri-
um, it
a. is always in their best interest to supply more to the market.
b. is always in their best interest to supply less to the market.
c. is always in their best interest to leave their quantities supplied unchanged.
d. may be in their best interest to do any of the above, depending on market conditions.
MSC: Interpretive
54. A situation in which firms choose their best strategy given the strategies chosen by the other firms in the mar-
ket is called
a. a competitive equilibrium.
b. an open-market solution.
c. a socially-optimal solution.
d. a Nash equilibrium.
MSC: Definitional

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55. When an oligopoly market reaches a Nash equilibrium,

a. the market price will be different for each firm.
b. the firms will not have behaved as profit maximizers.
c. a firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
d. a firm will not take into account the strategies of competing firms.
MSC: Interpretive
56. In a duopoly situation, the logic of self-interest results in a total output level that
a. equals the output level that would prevail in a competitive market.
b. equals the output level that would prevail in a monopoly.
c. exceeds the monopoly level of output, but falls short of the competitive level of output.
d. falls short of the monopoly level of output.
NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Analytical
57. As a group, oligopolists earn the highest profit when they

a. achieve a Nash equilibrium.
b. produce a total quantity of output that falls short of the Nash-equilibrium total quantity.
c. produce a total quantity of output that exceeds the Nash-equilibrium total quantity.
d. charge a price that falls short of the Nash-equilibrium price.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Nash equilibrium
MSC: Analytical
58. In order to be successful, a cartel must

a. find a way to encourage members to produce more than they would otherwise produce.
b. agree on the total level of production for the cartel, but they need not agree on the amount produced
by each member.
c. agree on the total level of production and on the amount produced by each member.
d. agree on the prices charged by each member, but they need not agree on amounts produced.
59. In a particular town, Comvision and Veriview are the only two providers of cable TV service. Comvision and
Veriview constitute a
a. duopoly, whether they collude or not.
b. cartel, whether they collude or not.
c. Nash industry, whether they collude or not.
d. monopolistically competitive market if they charge the same price.
60. Which of these situations produces the largest profits for oligopolists?
a. The firms reach a Nash equilibrium.
b. The firms reach the monopoly outcome.
c. The firms reach the competitive outcome.
d. The firms produce a quantity of output that lies between the competitive outcome and the
monopoly outcome.

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61. When firms have agreements among themselves on the quantity to produce and the price at which to sell out-
put, we refer to their form of organization as a
a. Nash arrangement.
b. cartel.
c. monopolistically competitive oligopoly.
d. perfectly competitive oligopoly.
NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Definitional
62. The equilibrium quantity in markets characterized by oligopoly is

a. higher than in monopoly markets and higher than in perfectly competitive markets.
b. higher than in monopoly markets and lower than in perfectly competitive markets.
c. lower than in monopoly markets and higher than in perfectly competitive markets.
d. lower than in monopoly markets and lower than in perfectly competitive markets.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Equilibrium quantity
MSC: Analytical
63. The equilibrium price in a market characterized by oligopoly is

a. higher than in monopoly markets and higher than in perfectly competitive markets.
b. higher than in monopoly markets and lower than in perfectly competitive markets.
c. lower than in monopoly markets and higher than in perfectly competitive markets.
d. lower than in monopoly markets and lower than in perfectly competitive markets.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Equilibrium price
MSC: Analytical
64. When oligopolistic firms interacting with one another each choose their best strategy given the strategies cho-
sen by other firms in the market, we have
a. a cartel.
b. a group of oligopolists behaving as a monopoly.
c. a Nash equilibrium.
d. the perfectly competitive outcome.
MSC: Definitional
65. As the number of firms in an oligopoly market

a. decreases, the price charged by firms likely decreases.
b. decreases, the market approaches the competitive market outcome.
c. increases, the market approaches the competitive market outcome.
d. increases, the market approaches the monopoly outcome.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Analytical
66. Assume oligopoly firms are profit maximizers, they do not form a cartel, and they take other firms' production
levels as given. Then in equilibrium the output effect
a. must dominate the price effect.
b. must be smaller than the price effect.
c. must balance with the price effect.
d. can be larger or smaller than the price effect.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Equilibrium
MSC: Analytical

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67. For cartels, as the number of firms (members of the cartel) increases,
a. the monopoly outcome becomes more likely.
b. the magnitude of the price effect decreases.
c. the more concerned each seller is about its own impact on the market price.
d. the easier it becomes to observe members violating their agreements.
68. Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time,
however, suppose the merging of firms results in the market being served by only three or four firms selling
this same product. As a result, we would expect
a. an increase in market output and an increase in the price of the product.
b. an increase in market output and an decrease in the price of the product.
c. a decrease in market output and an increase in the price of the product.
d. a decrease in market output and a decrease in the price of the product.
69. Cartels are difficult to maintain because

a. antitrust laws are difficult to enforce.
b. cartel agreements are conducive to monopoly outcomes.
c. there is always tension between cooperation and self-interest in a cartel.
d. firms pay little attention to the decisions made by other firms.
70. There are two types of markets in which firms face some competition yet are still able to have some control
over the prices of their products. Those two types of market are
a. monopolistic competition and oligopoly.
b. duopoly and triopoly.
c. perfect competition and monopolistic competition.
d. duopoly and imperfect competition.
NAT: Analytic LOC: Oligopoly | Monopolistic competition
TOP: Markets MSC: Interpretive
71. A group of firms that act in unison to maximize collective profits is called a
a. monopolistically competitive industry.
b. monopoly.
c. cartel.
d. Nash equilibrium market.
NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Definitional
72. An agreement among firms regarding price and/or production levels is called
a. an antitrust market.
b. a free-trade arrangement.
c. collusion.
d. a Nash agreement.

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73. If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they
will produce collectively will
a. be less than the monopoly quantity.
b. be equal to the monopoly quantity.
c. be greater than the monopoly quantity.
d. Any of the above are possible.
74. If duopolists individually pursue their own self-interest when deciding how much to produce, the profit-
maximizing price they will charge for their product will be
a. less than the monopoly price.
b. equal to the perfectly competitive market price.
c. greater than the monopoly price.
d. possibly less than or greater than the monopoly price.
75. To increase their individual profits, members of a cartel have an incentive to

a. charge a higher price than the other members of the cartel.
b. increase production above the level agreed upon.
c. ignore the choices made by the other firms and act as a monopolist.
d. charge the same price a monopolist would charge.
76. Once a cartel is formed, the market is in effect served by

a. a monopoly.
b. an oligopoly.
c. imperfect competition.
d. monopolistic competition.
77. If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then that oligop-
olist has the incentive to lower production with the aim of
a. lowering prices.
b. increasing profits for the group of firms as a whole.
c. increasing profits for itself, regardless of the impact on profits for the group of firms as a whole.
d. None of the above is correct.
78. When price is above marginal cost, selling one more unit at the current price will increase profit. This concept
is known as the
a. income effect.
b. price effect.
c. output effect.
d. cartel effect.
NAT: Analytic LOC: Oligopoly TOP: Profit maximization
MSC: Definitional

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79. In imperfectly competitive markets, increasing production will decrease the price of all units sold. This con-
cept is known as the
a. income effect.
b. cost effect.
c. output effect.
d. price effect.
MSC: Definitional
80. In a typical cartel agreement, the cartel maximizes profit when it

a. behaves as a monopolist.
b. behaves as a duopolist.
c. is flexible in enforcing production targets.
d. behaves as a perfectly competitive firm.
81. An oligopolist will increase production if the output effect is

a. less than the price effect.
b. equal to the price effect.
c. greater than the price effect.
d. The oligopolist never has an incentive to increase production.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Profit maximization
MSC: Interpretive
82. As the number of firms in an oligopoly increases,

a. each seller becomes more concerned about its impact on the market price.
b. the output effect decreases.
c. the total quantity of output produced by firms in the market gets closer to the socially efficient
quantity.
d. the oligopoly has more market power and firms earn a greater profit.
83. When an oligopoly grows very large, the

a. output effect disappears.
b. price effect disappears.
c. output effect equals the price effect.
d. price of the product greatly exceeds marginal cost.
84. As the number of firms in an oligopoly increases, the price approaches

a. zero.
b. marginal cost.
c. infinity.
d. the monopoly price.

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85. Like monopolists, oligopolists are aware that an increase in the quantity of output always
a. reduces the price of their product.
b. reduces their profit.
c. reduces their revenue.
d. reduces productivity.
86. Oligopolies would like to act like a

a. duopoly, but self-interest often drives them closer to the perfectly competitive outcome.
b. competitive firm, but self-interest often drives them closer to the duopoly outcome.
c. monopoly, but self-interest often drives them to charge a higher price than would be charged by a
monopoly.
d. monopoly, but self-interest often drives them closer to the perfectly competitive outcome.
87. Oligopolies can end up looking like competitive markets if the number of firms is
a. large and they all cooperate.
b. large and they do not cooperate.
c. small and they all cooperate.
d. small and they do not cooperate.
88. The theory of oligopoly provides another reason that free trade can benefit all countries because
a. increased competition leads to larger deadweight losses.
b. as the number of firms within a given market increases, the price of the good decreases.
c. as the number of firms within a given market increases, the profit of each firm increases.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | International trade
MSC: Interpretive
89. Firms do not need to be concerned about striking a balance between the price effect and the output effect when
making production decisions in which of the following types of markets?
a. oligopoly
b. duopoly
c. monopoly
d. competitive markets
MSC: Interpretive
90. If nations such as Germany, Japan, and the United States prohibited international trade in automobiles, a likely
effect would be that
a. the price effect would become a more significant consideration for each firm that makes
automobiles.
b. the excess of price over marginal cost would become less pronounced in the automobile market.
c. all countries would become better off.
d. automobile producers in the U.S. would collude to produce a large number of cars.
MSC: Interpretive

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91. The theory of oligopoly provides a reason why

a. perfect competition is not a useful object of study.
b. price is less than marginal cost for many firms.
c. all countries can benefit from free trade among nations.
d. firms do not want to capture larger shares of their markets.
MSC: Interpretive
92. During the 1990s, the members of OPEC operated independently from one another, causing the world market
for crude oil to become close to
a. a monopoly market.
b. an oligopoly market.
c. a duopoly market.
d. a competitive market.
NAT: Analytic LOC: Oligopoly TOP: OPEC MSC: Interpretive
Figure 17-1
93. Refer to Figure 17-1. Suppose this market is served by a duopoly in which each firm faces the marginal cost
curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also
shown. Which of the following statements is true?
a. The total output in this market will likely be 2 units when the market is served by a duopoly.
b. The price in this market will likely be $6 when the market is served by a duopoly.
c. The total revenue to each firm will likely be more than $16 when the market is served by a duopoly.
d. The total output in this market will likely be less than 4 units when the market is served by a
duopoly.
94. Refer to Figure 17-1. Suppose this market is served by two firms who each face the marginal cost curve
shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown.
If the firms are able to collude successfully,
a. the total output will be 2 units and the price will be $6.00 per unit.
b. the total output will be 2 units and the price will be $8.00 per unit.
c. the total output will be 4 units and the price will be $6.00 per unit.
d. there will be no deadweight loss.
NAT: Analytic LOC: Oligopoly TOP: Duopoly | Collusion | Efficiency
MSC: Interpretive

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95. Refer to Figure 17-1. Suppose this market is served by two firms who each face the marginal cost curve
shown in the diagram and have zero fixed cost. The marginal revenue curve that a monopolist would face in
this market is also shown. If the firms are able to collude successfully, each firm should earn a profit equal to
a. $1.
b. $2.
c. $4.
d. $6.
NAT: Analytic LOC: Oligopoly TOP: Duopoly | Collusion | Efficiency
MSC: Interpretive
96. The more firms an oligopoly has,

a. the more market power the oligopoly has. This results in higher prices and lower quantities of
output than an oligopoly with fewer firms would have.
b. the more important the price effect is, resulting in the market price being higher than when there are
fewer firms in the oligopoly.
c. the farther market price will be from marginal cost.
d. the more likely the firms will charge a price closer to the perfectly competitive price.
97. In an oligopoly, the total output produced in the market is

a. higher than the total output that would be produced if the market were a monopoly and higher than
the total output that would be produced if the market were perfectly competitive.
b. higher than the total output that would be produced if the market were a monopoly but lower than
c. lower than the total output that would be produced if the market were a monopoly but higher than
d. lower than the total output that would be produced if the market were a monopoly and lower than
Table 17-6. The table shows the demand schedule for a particular product.
Quantity Price
0 16
1 14
2 12
3 10
4 8
5 6
6 4
7 2
8 0
98. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a cartel.
What price will the cartel charge in this market if the marginal cost of production is $0?
a. $6
b. $8
c. $10
d. $12

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99. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a cartel. If
the marginal cost of production is $0 and there is no fixed cost, the combined profit of the cartel will be
a. $16
b. $24
c. $30
d. $32
100. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a cartel.
What price will the cartel charge in this market if the marginal cost of production is $4?
a. $6
b. $8
c. $10
d. $12
101. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a cartel. If
the marginal cost of production is $4 and the fixed cost is $6, the combined profit of the cartel will be
a. $6
b. $12
c. $24
d. $32
Table 17-7. The table shows the demand schedule for a particular product.
Quantity Price
0 10
5 9
10 8
15 7
20 6
25 5
30 4
35 3
40 2
45 1
50 0
102. Refer to Table 17-7. If this market is perfectly competitive and the marginal cost is constant at $2 per unit,
then how much output will be produced?
a. 20
b. 30
c. 35
d. 40
MSC: Applicative

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103. Refer to Table 17-7. Suppose the market for this product is served by two firms who have formed a cartel
and are colluding to set the price and quantity in this market. If the marginal cost to produce this product is
constant at $2 per unit, then what price will the cartel set in this market?
a. $4
b. $5
c. $6
d. $7
104. Refer to Table 17-7. Suppose the market for this product is served by two firms who have formed a cartel
and are colluding to set the price and quantity in this market. If the marginal cost to produce this product is
constant at $2 per unit and there is no fixed cost, then what will the combined profit of the cartel be?
a. $40
b. $60
c. $80
d. $120
Table 17-8. For a certain small town, the table shows the demand schedule for water. Assume the marginal cost of
supplying water is constant at $4 per bottle.
Price Quantity
(bottles)
$9 200
$8 400
$7 600
$6 800
$5 1000
$4 1200
$3 1400
$2 1600
105. Refer to Table 17-8. If there were many suppliers of bottled water, what would be the price and quantity?
a. The price would be $6 per gallon and the quantity would be 800 gallons.
b. The price would be $5 per gallon and the quantity would be 1000 gallons.
c. The price would be $4 per gallon and the quantity would be 1200 gallons.
d. The price would be $3 per gallon and the quantity would be 1400 gallons.
NAT: Analytic LOC: Perfect competition TOP: Competitive markets
MSC: Applicative
106. Refer to Table 17-8. If there were only one supplier of water, what would be the price and quantity?
a. The price would be $7 per gallon and the quantity would be 600 gallons.
b. The price would be $6 per gallon and the quantity would be 800 gallons.
c. The price would be $5 per gallon and the quantity would be 1000 gallons.
d. The price would be $4 per gallon and the quantity would be 1200 gallons.

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107. Refer to Table 17-8. If there are two suppliers of water, Victor and Sami, and if they have successfully
formed a cartel, then what would be the price and the market quantity?
a. The price would be $7 per bottle and the market quantity would be 600 bottles.
b. The price would be $6 per bottle and the market quantity would be 800 bottles.
c. The price would be $5 per bottle and the market quantity would be 1000 bottles.
d. The price would be $4 per bottle and the market quantity would be 1200 bottles.
108. Refer to Table 17-8. If there are two suppliers of water, Victor and Sami, and if they have successfully
formed a cartel and split the market evenly, then how many bottles will Sami supply?
a. 100
b. 200
c. 300
d. 400
Table 17-9
Only two firms, Acme and Pinnacle, sell a particular product. The table below shows the demand curve for
their product. Each firm has the same constant marginal cost of $10 and zero fixed cost.
Price Quantity Total
Revenues
70 0 0
65 100 6500
60 200 12000
55 300 16500
50 400 20000
45 500 22500
40 600 24000
35 700 24500
30 800 24000
25 900 22500
20 1000 20000
15 1100 16500
10 1200 12000
5 1300 6500
0 1400 0
109. Refer to Table 17-9. If Acme and Pinnacle operate to jointly maximize profits, then what is the price?
a. $45
b. $40
c. $35
d. $30
NAT: Analytic LOC: Oligopoly TOP: Monopoly MSC: Applicative

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110. Refer to Table 17-9. If Acme and Pinnacle operate to jointly maximize profits, then what quantity is sold?
a. 800
b. 700
c. 600
d. 500
NAT: Analytic LOC: Oligopoly TOP: Monopoly MSC: Applicative
111. Refer to Table 17-9. If Acme and Pinnacle operate to jointly maximize profits and agree to share the profit
equally, then how much profit will each of them earn?
a. $9,000
b. $8,750
c. $8,000
d. $6,750
NAT: Analytic LOC: Oligopoly TOP: Monopoly MSC: Analytical
112. Refer to Table 17-9. Acme and Pinnacle agree to maximize joint profits. However, while Acme produces the
agreed upon amount, Pinnacle breaks the agreement and produces 100 more than agreed, how much profit
does Pinnacle make?
a. $10,000
b. $9,000
c. $8,750
d. $7500
113. Refer to Table 17-9. Acme and Pinnacle agree to jointly maximize profits. If Acme and Pinnacle each break
the agreement and each produce 100 more than agreed upon, how much less profit does each make?
a. $250
b. $750
c. $1,000
d. $2,000
114. Refer to Table 17-9. If this market were perfectly competitive instead of oligopolistic, what quantity would
be produced?
a. 1400
b. 1300
c. 1200
d. 1100
MSC: Applicative
115. Refer to Table 17-9. If this market were perfectly competitive instead of oligopolistic, what would the price
be?
a. $15
b. $10
c. $5
d. $0
MSC: Applicative

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116. Refer to Table 17-9. What is the socially efficient quantity of the product?
a. 700
b. 1000
c. 1200
d. 1400
NAT: Analytic LOC: Oligopoly TOP: Efficiency MSC: Applicative
117. Refer to Table 17-9. How much less do each of these firms earn in the Nash equilibrium than if they jointly
maximize profits?
a. $250
b. $500
c. $750
d. $1000
MSC: Analytical
Table 17-10
The table shows the town of Driveaway’s demand schedule for gasoline. Assume the town’s gasoline seller(s)
incurs a cost of $2 for each gallon sold, with no fixed cost.
Quantity (in gallons) Price Total Revenue

0 $8 $0
50 7 350
100 6 600
150 5 750
200 4 800
250 3 750
300 2 600
350 1 350
400 0 0
118. Refer to Table 17-10. If the market for gasoline in Driveaway is perfectly competitive, then the equilibrium
price of gasoline is
a. $0 and the equilibrium quantity is 400 gallons.
b. $1 and the equilibrium quantity is 350 gallons.
c. $2 and the equilibrium quantity is 300 gallons.
d. $4 and the equilibrium quantity is 200 gallons.
NAT: Analytic LOC: Perfect competition
TOP: Perfect competition | Equilibrium price MSC: Applicative
119. Refer to Table 17-10. Suppose we observe that the price of a gallon of gasoline in Driveaway is $2. Given
this observation, which of the following scenarios is most likely?
a. There is one seller of gasoline in Driveaway.
b. There are two sellers of gasoline in Driveaway.
c. There are a few sellers of gasoline in Driveaway, but the number of sellers exceeds two.
d. There are many sellers of gasoline in Driveaway.
NAT: Analytic LOC: Perfect competition TOP: Perfect competition
MSC: Applicative

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120. Refer to Table 17-10. If the market for gasoline in Driveaway is a monopoly, then the profit-maximizing
monopolist will charge a price of
a. $6 and sell 100 gallons.
b. $5 and sell 150 gallons.
c. $4 and sell 200 gallons.
d. $3 and sell 250 gallons.
NAT: Analytic LOC: Monopoly TOP: Monopoly | Profit maximization
MSC: Applicative
121. Refer to Table 17-10. If the market for gasoline in Driveaway is a monopoly, then the monopolist’s maxi-
mum profit is
a. $350.
b. $400.
c. $450.
d. $500.
NAT: Analytic LOC: Monopoly TOP: Monopoly | Profit maximization
MSC: Applicative
122. Refer to Table 17-10. Suppose we observe that the price of a gallon of gasoline in Driveaway is $5; we ob-
serve as well that a particular seller’s profit is $150. Given this observation, which of the following scenarios
is most likely?
a. The market for gasoline in Driveaway is a monopoly.
b. There are two identical sellers of gasoline in Driveaway, and the sellers collude.
c. There are two identical sellers of gasoline in Driveaway, and the sellers do not collude.
d. There are three identical sellers of gasoline in Driveaway, and the sellers collude.
NAT: Analytic LOC: Monopoly TOP: Collusion MSC: Applicative
123. Refer to Table 17-10. If there are exactly two sellers of gasoline in Driveaway and if they collude, then
which of the following outcomes is most likely?
b. Each seller will sell 75 gallons and charge a price of $2.50.
NAT: Analytic LOC: Oligopoly TOP: Duopoly | Profit maximization
MSC: Applicative
124. Refer to Table 17-10. If there are exactly five sellers of gasoline in Driveaway and if they collude, then
b. Each seller will sell 40 gallons and charge a price of $4.
125. Refer to Table 17-10. If there are exactly five sellers of gasoline in Driveaway and if they collude, then
a. Each seller will sell 20 gallons, charge a price of $6, and earn a profit of $80.
b. Each seller will sell 30 gallons, charge a price of $5, and earn a profit of $90.
c. Each seller will sell 40 gallons, charge a price of $4, and earn a profit of $120.
d. Each seller will sell 50 gallons, charge a price of $3, and earn a profit of $50.
NAT: Analytic LOC: Oligopoly TOP: Duopoly | Profit maximization
MSC: Applicative

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126. Refer to Table 17-10. Suppose there are exactly two sellers of gasoline in Driveaway: Amogo and Spilmeri-
ca. If Amogo sells 150 gallons and Spilmerica sells 100 gallons, then
a. Amogo’s profit is $150 and Spilmerica’s profit is $100.
b. Amogo’s profit is $100 and Spilmerica’s profit is $66.67.
c. Amogo’s profit is $75 and Spilmerica’s profit is $50.
d. there is an excess supply of gasoline in Driveaway.
127. Cartels in the United States are

a. legal if price is competitively determined.
b. legal if all firms in the industry agree to the terms of the cartel.
c. legal if all conditions of the cartel are made public.
d. illegal.
128. Which of the following would be most likely to contribute to the breakdown of a cartel in a natural resource
(e.g., bauxite) market?
a. high prices
b. low price elasticity of demand
c. high compatibility of member interests
d. unequal member ownership of the natural resource
129. An equilibrium in which each firm in an oligopoly maximizes profit, given the actions of its rivals, is called
a. a general equilibrium.
b. a dominant equilibrium.
c. a Nash equilibrium.
d. an oligopoly equilibrium.
MSC: Definitional
130. An oligopoly would tend to restrict output and drive up price if

a. barriers to entering the industry are negligible.
b. firms engage in informative advertising.
c. firms produce a standardized product.
d. firms collude and behave like a monopoly.
NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Interpretive
131. If duopoly firms that are not colluding were able to successfully collude, then
a. price and quantity would rise.
b. price and quantity would fall.
c. price would rise and quantity would fall.
d. price would fall and quantity would rise.

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132. If one firm left a duopoly market where the firms did not cooperate then
a. price and quantity would rise
b. price would rise and quantity would fall.
c. quantity would rise and price would fall.
d. quantity and price would fall.
133. If a market is a duopoly and additional firms enter and do not cooperate, then
a. price and quantity fall.
b. price and quantity rise.
c. price falls and quantity rises.
d. price rises and quantity falls.
134. Other things the same, in which case is the quantity produced the highest?
a. There is one firm.
b. There are two firms that successfully collude.
c. There are two firms in Nash equilibrium.
d. There are a very large number of firms.
NAT: Analytic LOC: Oligopoly TOP: Market structure comparison
MSC: Interpretive
135. If duopolists colluded but then stopped colluding,

a. price and quantity would rise.
b. price would rise and quantity would fall.
c. price would fall and quantity would rise
d. price and quantity would fall.
136. In which case do firms have some control over their price?
a. oligopoly and perfect competition
b. oligopoly but not perfect competition
c. perfect competition but not oligopoly
d. neither perfect competition nor oligopoly
NAT: Analytic LOC: Oligopoly TOP: Market structure comparison
MSC: Interpretive
137. The oligopoly price will be greater than marginal cost but less than the monopoly price when
a. the oligopolists collude by jointly choosing a quantity to produce and maintaining their agreement.
b. the oligopolists collude by jointly choosing a price to charge and maintaining their agreement.
c. each oligopolist individually chooses a quantity to produce to maximize profit.
d. each oligopolist’s objective is minimization of average total cost, rather than maximization of
profit.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Price
MSC: Interpretive

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138. In pursing its own interest, an oligopoly firm will decide to increase production by 1 unit as long as
a. there is no output effect.
b. there is no price effect.
c. the output effect is larger than the price effect.
d. the price effect is larger than the output effect.
NAT: Analytic LOC: Oligopoly TOP: Output effect | Price effect
MSC: Interpretive
THE ECONOMICS OF COOPERATION
1. When firms are faced with making strategic choices in order to maximize profit, economists typically use
a. the theory of monopoly to model their behavior.
b. the theory of aggressive competition to model their behavior.
c. game theory to model their behavior.
d. cartel theory to model their behavior.
MSC: Interpretive
2. When strategic interactions are important to pricing and production decisions, a typical firm will
a. set the price of its product equal to marginal cost.
b. consider how competing firms might respond to its actions.
c. generally operate as if it is a monopolist.
d. consider exiting the market.
MSC: Interpretive
3. Game theory is important for the understanding of

a. competitive markets.
b. monopolies.
c. oligopolies.
d. all market structures.
MSC: Interpretive
4. Game theory is necessary for understanding

a. all market structures.
b. competition and oligopoly, but it is not necessary for understanding monopoly.
c. monopoly and oligopoly, but it is not necessary for understanding competition.
d. oligopoly, but it is not necessary for understanding monopoly or competition.
MSC: Interpretive
5. The prisoners' dilemma provides insights into the

a. difficulty of maintaining cooperation.
b. benefits of avoiding cooperation.
c. benefits of government ownership of monopoly.
d. ease with which oligopoly firms maintain high prices.
NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma
MSC: Interpretive

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6. In the prisoners' dilemma game, self-interest leads

a. each prisoner to confess.
b. to a breakdown of any agreement that the prisoners might have made before being questioned.
c. to an outcome that is not particularly good for either prisoner.
MSC: Interpretive
7. The likely outcome of the standard prisoners' dilemma game is that

a. neither prisoner confesses.
b. exactly one prisoner confesses.
c. both prisoners confess.
d. Not enough information is given to answer this question.
MSC: Interpretive
8. The prisoners' dilemma is an important game to study because

a. most games present zero-sum alternatives.
b. it identifies the fundamental difficulty in maintaining cooperative agreements.
c. strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive
agreements.
d. all interactions among firms are represented by this game.
MSC: Interpretive
9. The prisoners’ dilemma game

a. provides insight into why cooperation is individually rational.
b. provides insight into why cooperation is difficult.
c. is a game in which neither player has a dominant strategy.
d. is a game in which exactly one of the two players has a dominant strategy.
MSC: Interpretive
10. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one
a. in which neither Bonnie nor Clyde confesses.
b. in which both Bonnie and Clyde confess.
c. that involves neither Bonnie nor Clyde pursuing a dominant strategy.
d. that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest.
MSC: Interpretive
11. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is
a. a very good outcome for both players.
b. a very good outcome for Bonnie, but a bad outcome for Clyde.
c. a very good outcome for Clyde, but a bad outcome for Bonnie.
d. a bad outcome for both players.
MSC: Interpretive

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12. In a game, a dominant strategy is

a. the best strategy for a player to follow only if other players are cooperative.
b. the best strategy for a player to follow, regardless of the strategies followed by other players.
c. a strategy that must appear in every game.
d. a strategy that leads to one player's interests dominating the interests of the other players.
NAT: Analytic LOC: Oligopoly TOP: Dominant strategy
MSC: Definitional
13. A dominant strategy is one that

a. makes every player better off.
b. makes at least one player better off without hurting the competitiveness of any other player.
c. increases the total payoff for the player.
d. is best for the player, regardless of what strategies other players follow.
MSC: Definitional
Table 17-11
Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare
related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that
cigarette smoke causes lung cancer (and other related illnesses). State prosecutors do not have access to the
same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help
of at least one cigarette firm study. Each firm has been presented with an opportunity to lower its liability in
the suit if it cooperates with attorneys representing the states.
Firm B
Concede that cigarette Argue that there is no evidence
smoke causes lung cancer that smoke causes cancer
Concede that cigarette Firm A profit = $–20 Firm A profit = $–50
smoke causes lung cancer Firm B profit = $–15 Firm B profit = $–5
Firm A Argue that there is no
Firm A profit = $–5 Firm A profit = $–10
evidence that smoke causes
Firm B profit = $–50 Firm B profit = $–10
cancer
14. Refer to Table 17-11. Pursuing its own best interests, Firm A will concede that cigarette smoke causes lung
cancer
a. only if Firm B concedes that cigarette smoke causes lung cancer.
b. only if Firm B does not concede that cigarette smoke causes lung cancer.
c. regardless of whether Firm B concedes that cigarette smoke causes lung cancer.
d. None of the above. In pursuing its own best interests, Firm A will in no case concede that cigarette
smoke causes lung cancer.
MSC: Applicative
15. Refer to Table 17-11. Pursuing its own best interests, Firm B will concede that cigarette smoke causes lung
cancer
a. only if Firm A concedes that cigarette smoke causes lung cancer.
b. only if Firm A does not concede that cigarette smoke causes lung cancer.
c. regardless of whether Firm A concedes that cigarette smoke causes lung cancer.
d. None of the above; in pursuing its own best interests, Firm B will in no case concede that cigarette
smoke causes lung cancer.
MSC: Applicative

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16. Refer to Table 17-11. If both firms follow a dominant strategy, Firm A's profits (losses) will be
a. $-50
b. $-20
c. $-10
d. $-5
MSC: Applicative
17. Refer to Table 17-11. If both firms follow a dominant strategy, Firm B's profits (losses) will be
a. $-50
b. $-15
c. $-10
d. $-5
MSC: Applicative
18. Refer to Table 17-11. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be
a. $-5 and $-50, respectively.
b. $-10 and $-10, respectively.
c. $-20 and $-15, respectively.
d. $-50 and $-5, respectively.
MSC: Applicative
Table 17-12
Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a
mythical nation). Historically, legislators have made threats of not renewing MFN status because of human
rights abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures
by Farland. The payoff table below shows the potential economic gains associated with a game in which
Farland may impose trade sanctions against U.S. firms and the United States may not renew MFN status with
Farland. The table contains the dollar value of all trade-flow benefits to the United States and Farland.
Farland
Impose trade sanctions Do not impose trade sanctions
against U.S. firms against U.S. firms
Don't renew MFN U.S. trade value = $65 b U.S. trade value = $140 b
United status with Farland Farland trade value = $75 b Farland trade value = $5 b
States Renew MFN status U.S. trade value = $35 b U.S. trade value = $130 b
with Farland Farland trade value = $285 b Farland trade value = $275 b
19. Refer to Table 17-12. Pursuing its own best interests, Farland will impose trade sanctions against U.S. firms
a. only if the U.S. does not renew MFN status with Farland.
b. only if the U.S. renews MFN status with Farland.
c. regardless of whether the U.S. renews MFN status with Farland.
d. None of the above is correct. In pursuing its own best interests, Farland will in no case impose trade
sanctions against U.S. firms.
MSC: Applicative

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20. Refer to Table 17-12. Pursuing its own best interests, the U.S. will renew MFN status with Farland
a. only if Farland does not impose trade sanctions against U.S. firms.
b. only if Farland imposes trade sanctions against U.S. firms.
c. regardless of whether Farland imposes trade sanctions against U.S. firms.
d. None of the above is correct. In pursuing its own best interests, the United States will in no case
renew MFN status with Farland.
MSC: Applicative
21. Refer to Table 17-12. This particular game
a. features a dominant strategy for the U.S.
b. features a dominant strategy for Farland.
c. is a version of the prisoners' dilemma game.
NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Dominant strategy
MSC: Applicative
22. Refer to Table 17-12. If both countries follow a dominant strategy, the value of trade flow benefits for Far-
land will be
a. $5 b.
b. $75 b.
c. $275 b.
d. $285 b.
MSC: Applicative
23. Refer to Table 17-12. If both countries follow a dominant strategy, the value of trade flow benefits for the
United States will be
a. $35 b.
b. $65 b.
c. $130 b.
d. $140 b.
MSC: Applicative
24. Refer to Table 17-12. When this game reaches a Nash equilibrium, the value of trade flow benefits will be
a. United States $35 b and Farland $285 b.
b. United States $65 b and Farland $75 b.
c. United States $140 b and Farland $5 b.
d. United States $130 b and Farland $275 b.
MSC: Applicative
25. Refer to Table 17-12. If trade negotiators are able to communicate effectively about the consequences of var-
ious trade policies (i.e., enter into an agreement about the policy they should adopt), then we would expect the
countries to agree to which outcome?
a. United States $35 b and Farland $285 b
b. United States $65 b and Farland $75 b
c. United States $140 b and Farland $5 b
d. United States $130 b and Farland $275 b
MSC: Applicative

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26. Refer to Table 17-12. Assume that trade negotiators meet to discuss trade policy between the United States
and Farland. If neither party to the negotiation is able to trust the other party, then
a. each should assume that the other will choose a strategy that optimizes total value of the trade
relationship.
b. the Nash equilibrium will provide the largest possible gains to each party.
c. Farland negotiators should assume that United States negotiators will implement a policy that is in
the mutual best interest of both countries.
d. each should follow its dominant strategy.
MSC: Applicative
Table 17-13
Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding
their market share. Both are interested in expanding the size of their store and parking lot to accommodate
potential growth in their customer base. The following game depicts the strategic outcomes that result from the
game. Increases in annual profits of the two home-improvement stores are shown in the table below.
Lopes
Increase the size of store Do not increase the size of
and parking lot store and parking lot
Increase the size
Lopes = $1.0 million Lopes = $0.4 million
of store and
HomeMax = $1.5 million HomeMax = $3.4 million
parking lot
HomeMax
Do not increase
Lopes = $3.2 million Lopes = $2.00 million
the size of store
HomeMax = $0.6 million HomeMax = $2.5 million
and parking lot
27. Refer to Table 17-13. Pursuing its own best interest, Lopes will
a. increase the size of its store and parking lot only if HomeMax also increases the size of its store and
parking lot.
b. increase the size of its store and parking lot only if HomeMax does not increase the size of its store
and parking lot.
c. increase the size of its store and parking lot regardless of the decision made by HomeMax.
d. not increase the size of its store and parking lot regardless of the decision made by HomeMax.
MSC: Applicative
28. Refer to Table 17-13. Pursuing its own best interest, HomeMax will
a. increase the size of its store and parking lot only if Lopes also increases the size of its store and
parking lot.
b. increase the size of its store and parking lot only if Lopes does not increase the size of its store and
parking lot.
c. increase the size of its store and parking lot regardless of the decision made by Lopes.
d. not increase the size of its store and parking lot regardless of the decision made by Lopes.
MSC: Applicative
29. Refer to Table 17-13. Increasing the size of its store and parking lot is a dominant strategy for
a. Lopes, but not for HomeMax.
b. HomeMax, but not for Lopes.
c. both stores.
d. neither store.
MSC: Applicative

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30. Refer to Table 17-13. If both stores follow a dominant strategy, HomeMax's annual profit will grow by
a. $0.6 million.
b. $1.5 million.
c. $2.5 million.
d. $3.4 million.
NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy
MSC: Applicative
31. Refer to Table 17-13. If both stores follow a dominant strategy, Lopes's annual profit will grow by
a. $0.4 million.
b. $1.0 million.
c. $2.0 million.
d. $3.2 million.
MSC: Applicative
32. Refer to Table 17-13. When this game reaches a Nash equilibrium, annual profit will grow by
a. $1.5 million for HomeMax and by $1.0 million for Lopes.
b. $3.4 million for HomeMax and by $0.4 million for Lopes.
c. $0.6 million for HomeMax and by $3.2 million for Lopes.
d. $2.5 million for HomeMax and by $2.0 million for Lopes.
MSC: Applicative
33. Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one af-
ternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to
a. increase their store and parking lot sizes.
b. refrain from increasing their store and parking lot sizes.
c. be more competitive in capturing market share.
d. share the context of their conversation with the Federal Trade Commission.
34. Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one af-
ternoon and happen to discuss a strategy to optimize growth related profit. If they both agree to cooperate on a
strategy that maximizes their joint profits, annual profit will grow by
a. $1.0 million for Lopes and by $1.5 million for HomeMax.
b. $0.4 million for Lopes and by $3.4 million for HomeMax.
c. $3.2 million for Lopes and by $0.6 million for HomeMax.
d. $2.0 million for Lopes and by $2.5 million for HomeMax.

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Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low
level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two
companies.
ABC's Decision
High output Low output
ABC's profit = $3 million ABC's profit = $2.5 million
High output
XYZ's profit = $3 million XYZ's profit = $4 million

XYZ's
Decision
ABC's profit = $4 million ABC's profit = $3.5 million
Low output
XYZ's profit = $2.5 million XYZ's profit = $3.5 million
35. Refer to Figure 17-1. The dominant strategy for ABC is to

a. produce high output, and the dominant strategy for XYZ is to produce high output.
b. produce high output, and the dominant strategy for XYZ is to produce low output.
c. produce low output, and the dominant strategy for XYZ is to produce high output.
d. produce low output, and the dominant strategy for XYZ is to produce low output.
MSC: Applicative
36. Refer to Figure 17-1. Which of the following statements is correct?

a. ABC can potentially earn its highest possible profit if it produces a high level of output, and for that
reason it is a dominant strategy for ABC to produce a high level of output.
b. The highest possible combined profit for the two firms occurs when both produce a low level of
output, and for that reason producing a low level of output is a dominant strategy for both firms.
c. Regardless of the strategy pursued by ABC, XYZ’s best strategy is to produce a high level of
output, and for that reason producing a high level of output is a dominant strategy for XYZ.
d. Our knowledge of game theory suggests that the most likely outcome of the game, if it is played
only once, is for one firm to produce a low level of output and for the other firm to produce a high
level of output.
MSC: Applicative
37. Refer to Figure 17-1. If this game is played only once, then the most likely outcome is that
a. both firms produce a low level of output.
b. ABC produces a low level of output and XYZ produces a high level of output.
c. ABC produces a high level of output and XYZ produces a low level of output.
d. both firms produce a high level of output.
MSC: Applicative

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38. Refer to Figure 17-1. If this game is played repeatedly and ABC uses a tit-for-tat strategy, it will choose a
a. high level of output in the first round and in subsequent rounds it will choose whatever XYZ chose
in the previous round.
b. low level of output in the first round and in subsequent rounds it will choose whatever XYZ chose
in the previous round.
c. high level of output in all rounds, regardless of the choice made by XYZ.
d. high level of output in all rounds, regardless of the choice made by XYZ.
MSC: Applicative
39. Much of the research on game theory in recent decades was driven by attempts to analyze actions of players
during
a. the Great Depression of the 1930s.
b. World War II.
c. the Cold War between the United States and the Soviet Union.
d. the ascendancy of the conservative movement in the United States in the 1970s and 1980s.
MSC: Interpretive
40. Consider a game of the “Jack and Jill” type in which a market is a duopoly and each firm decides to produce
either a “high” quantity of output or a “low” quantity of output. If the two firms successfully reach and main-
tain the cooperative outcome of the game, then
a. both the combined profit of the firms and total surplus are maximized.
b. the combined profit of the firms is maximized but total surplus is not maximized.
c. the combined profit of the firms is not maximized but total surplus is maximized.
d. neither the combined profit of the firms nor total surplus is maximized.
MSC: Interpretive
41. Games that are played more than once generally

a. lead to outcomes dominated purely by self-interest.
b. lead to outcomes that do not reflect joint rationality.
c. encourage cheating on cartel production quotas.
d. make collusive arrangements easier to enforce.
MSC: Interpretive
42. Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable outcome is
that
a. each player tries to capture a large portion of the market share.
b. the players play the game not once but many times.
c. the game becomes more competitive.
d. self interest results in the Nash equilibrium which is the best outcome for the players.
MSC: Interpretive

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43. In a two-person repeated game, a tit-for-tat strategy starts with

a. cooperation and then each player mimics the other player's last move.
b. cooperation and then each player is unresponsive to the strategic moves of the other player.
c. noncooperation and then each player pursues his or her own self-interest.
d. noncooperation and then each player cooperates when the other player demonstrates a desire for the
cooperative solution.
MSC: Interpretive
44. A tit-for-tat strategy starts out

a. conciliatory and then encourages an optimal social outcome among the other players.
b. unfriendly and then encourages friendly strategies among players.
c. friendly, then penalizes unfriendly players, and forgives them if warranted.
d. aggressive, then compensates losing players, and eventually forgives unfriendly players.
MSC: Interpretive
45. Individual profit earned by Dave, the oligopolist, depends on which of the following?
(i) The quantity of output that Dave produces
(ii) The quantities of output that the other firms in the market produce
(iii) The extent of collusion between Dave and the other firms in the market
a. (i) and (ii)
b. (ii) and (iii)
c. (iii) only
d. (i), (ii), and (iii)
46. Which of the following statements is (are) true of the prisoners' dilemma?
(i) Rational self-interest leads neither party to confess.
(ii) Cooperation between the prisoners is difficult to maintain.
(iii) Cooperation between the prisoners is individually rational.
a. (ii) only
b. (ii) and (iii)
c. (i) and (iii)
MSC: Interpretive
47. When the prisoners’ dilemma game is generalized to describe situations other than those that literally involve
two prisoners, we see that cooperation between the players of the game
a. can be difficult to maintain, but only when cooperation would make at least one of the players of
the game worse off.
b. can be difficult to maintain, even when cooperation would make both players of the game better
off.
c. always works to the benefit of society as a whole.
d. always works to the detriment of society as a whole.
MSC: Interpretive

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Scenario 17-2. Imagine that two oil companies, Mobile and Cargo, own adjacent oil fields. Under the fields is
a common pool of oil worth $96 million. Drilling a well to recover oil costs $3 million per well. If each
company drills one well, each will get half of the oil and earn a $45 million profit ($48 million in revenue - $3
million in costs). Assume that having X percent of the total wells means that a company will collect X percent
of the total revenue.
48. Refer to Scenario 17-2. If Mobile and Cargo are able to successfully collude to maximize their joint profits,
Mobile will
a. drill one well and Cargo will drill one well.
b. drill one well and Cargo will drill two wells.
c. drill two wells and Cargo will drill one well.
d. drill two wells and Cargo will drill two wells.
NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Common resources
MSC: Applicative
49. Refer to Scenario 17-2. If Mobile and Cargo are able to successfully collude to maximize their joint profits,
Mobile will earn
a. $29 million and Cargo will earn $58 million.
b. $42 million and Cargo will earn $42 million.
c. $45 million and Cargo will earn $45 million.
d. $58 million and Cargo will earn $29 million.
MSC: Applicative
50. Refer to Scenario 17-2. If Mobile were to drill a second well, what would its profit be if Cargo did not drill a
second well?
a. $29 million
b. $58 million
c. $61 million
d. $64 million
MSC: Applicative
51. Refer to Scenario 17-2. If Mobile were to drill a second well and Cargo also drilled a second well, what
would Mobile's profit be?
a. $24 million
b. $42 million
c. $45 million
d. $48 million
MSC: Applicative
52. Refer to Scenario 17-2. Cargo's dominant strategy would lead to what sort of well-drilling behavior?
a. Cargo will never drill a second well.
b. Cargo will always drill a second well.
c. Cargo will drill a second well only if Mobile drills a well.
d. Cargo will drill a second well only if Mobile does not drill a well.
MSC: Applicative

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53. Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $30 mil-
lion. For each well that is drilled, the company that drills the well incurs a cost of $3 million. Each company
can drill up to two wells. What is the likely outcome of this game if each company pursues its own self-
interest?
a. Each company drills one well and experiences a profit of $12 million.
b. Each company drills one well and experiences a profit of $10 million.
c. Each company drills two wells and experiences a profit of $9 million.
d. One company drills two wells and experiences a profit of $14 million; the other company drills one
well and experiences a profit of $7 million.
NAT: Analytic LOC: Oligopoly TOP: Common resources | Prisoners' dilemma
MSC: Applicative
54. We know that people tend to overuse common resources. This problem can be viewed as an example of
a. a game in which the players succeed in reaching the cooperative outcome.
b. the prisoners’ dilemma.
c. a situation to which game theory does not apply because of a lack of strategic thinking.
d. a situation to which game theory does not apply because of too many decision-makers.
MSC: Applicative
55. The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly outcome
is best for the oligopolists,
a. they collude to set the output level equal to the Nash equilibrium level of output.
b. they have incentives to increase production above the monopoly outcome.
c. they do not behave as profit maximizers.
d. self-interest juxtaposes the profits earned at the Nash equilibrium.
56. Hot dog vendors on the beach fail to cooperate with one another on the quantity of hot dogs they should sell to
earn monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would like,
(i) the quantity of hot dogs supplied is closer to the socially optimal level.
(ii) the price of hot dogs is closer to marginal cost.
(iii) the hot dog market at the beach is less competitive.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (iii) only
NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Analytical
57. Why would lack of cooperation between criminal suspects be desirable for society as a whole?
a. The suspects are able to choose optimal outcomes for themselves by acting in their own self
interest.
b. The prisoners' dilemma safeguards the criminals' constitutional rights.
c. More criminals will be convicted.
d. None of the above is correct.
MSC: Interpretive

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58. What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly market?
(i) The firms may well reach the monopoly outcome.
(ii) The firms may well reach the competitive outcome.
(iii) Buyers of the oligopolists' product will likely be worse off as a result.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
MSC: Interpretive
59. In game theory, a Nash equilibrium is

a. an outcome in which each player is doing his best given the strategies chosen by the other players.
b. an outcome in which no player wishes to change her chosen strategy given the strategies chosen by
the other players.
c. the outcome that occurs when all players have a dominant strategy.
MSC: Interpretive
Scenario 17-3. Consider two countries, Muria and Zenya, that are engaged in an arms race. Each country
must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more
arms than the other because a large arsenal gives it more influence in world affairs. But each country also
prefers to live in a world safe from the other country's weapons. The following table shows the possible
outcomes for each decision combination. The numbers in each cell represent the country’s ranking of the
outcome (4 = best outcome, 1 = worst outcome).
Zenya
Build new weapons Disarm existing weapons
Build new Muria: 2 Muria: 4
weapons Zenya: 2 Zenya: 1
Muria
Disarm existing Muria: 1 Muria: 3
weapons Zenya: 4 Zenya: 3
60. Refer to Scenario 17-3. If Zenya chooses to build new weapons, then Muria will
a. disarm in order to prevent the loss of influence in world affairs.
b. disarm in order to promote world peace.
c. build new weapons in order to prevent the loss of influence in world affairs.
d. None of the above are correct.
MSC: Applicative
61. Refer to Scenario 17-3. If Zenya chooses to disarm its existing weapons, then Muria will
a. disarm in order to increase its influence in world affairs.
b. disarm in order to promote world peace.
c. build new weapons in order to promote world peace.
d. build new weapons in order to increase its influence in world affairs.
MSC: Applicative

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62. Refer to Scenario 17-3. Which of these statements is correct?

(i) Muria is better off building new weapons if Zenya builds new weapons.
(ii) Muria is better off building new weapons if Zenya disarms existing weapons.
(iii) Building new weapons is Muria's dominant strategy.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
MSC: Applicative
63. Refer to Scenario 17-3. Building new weapons is a dominant strategy for
a. Muria, but not for Zenya.
b. Zenya, but not for Muria.
c. both Muria and Zenya.
d. neither Muria nor Zenya.
MSC: Applicative
64. Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In reality these two
countries may have a hard time keeping this agreement due to which of the following reasons?
(i) Even though Muria has no incentive to cheat on the agreement, Zenya has an incentive to
cheat on the agreement.
(ii) Much like the prisoners’ dilemma, both countries are better off reneging on the agreement
and building new weapons.
(iii) Both countries want to increase their world power by building new weapons.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
MSC: Applicative
Scenario 17-4. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the
two companies split the market and earn $50 million each. If they both advertise, they again split the market,
but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company
advertises while the other does not, the one that advertises attracts customers from the other. In this case, the
company that advertises earns $60 million while the company that does not advertise earns only $30 million.
65. Refer to Scenario 17-4. What will these two companies do if they behave as individual profit maximizers?
a. Neither company will advertise.
b. Both companies will advertise.
c. One company will advertise, the other will not.
d. There is no way of knowing without knowing how many customers are stolen through advertising.
MSC: Applicative

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66. Refer to Scenario 17-4. The likely outcome of this game is that PM Inc. earns
a. $30 million and Brown Inc. earns $60 million.
b. $40 million and Brown Inc. earns $40 million.
c. $50 million and Brown Inc. earns $50 million.
d. $60 million and Brown Inc. earns $30 million.
MSC: Applicative
67. Refer to Scenario 17-4. If these two companies collude and agree upon the best joint strategy,
a. neither company will advertise.
b. both companies will advertise.
c. PM Inc. will advertise but Brown Inc. will not.
d. Brown Inc. will advertise but PM Inc. will not.
MSC: Applicative
68. Refer to Scenario 17-4. PM Inc.'s dominant strategy is to

a. refrain from advertising regardless of whether Brown Inc. advertises.
b. advertise only if Brown Inc. advertises.
c. advertise only if Brown Inc. does not advertise.
d. advertise regardless of whether Brown Inc. advertises.
MSC: Applicative
69. Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on television. If
cigarette companies are profit maximizers, it is likely that
a. neither company opposed the ban on advertising.
b. Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation.
c. both companies sued the federal government on grounds that the ban constitutes a civil rights
violation.
d. both companies retaliated with black-market operations.
MSC: Applicative
70. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and
finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the fol-
lowing: "If you confess to dealing drugs and testify against your partner, you will be given immunity and re-
leased while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither
confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of
marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do?
a. Confess regardless of the partner's decision
b. Confess only if the partner confesses
c. Don’t confess regardless of the partner's decision
d. Don’t confess only if the partner doesn’t confess
MSC: Applicative

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71. A lack of cooperation by oligopolists trying to maintain monopoly profits

a. is desirable for society as a whole.
b. is not desirable for society as a whole.
c. may or may not be desirable for society as a whole.
d. is not a concern due to antitrust laws.
72. Oligopolists may well be able to reach their preferred, cooperative outcome if
a. the number of oligopolists is large.
b. they learn that a Nash equilibrium is in their best long-term interests.
c. a sufficient number of firms can be persuaded to lower their prices.
d. the game they play is repeated a sufficient number of times.
MSC: Interpretive
73. Martha and Oleg are competitors in a local market and each is trying to decide if it is worthwhile to advertise.
If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit
of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $15,000
and the other will earn $7,000. To earn the highest profit, Martha
a. should advertise, and she will earn $5,000.
b. should advertise, and she will earn $15,000.
c. should not advertise, and she will earn $10,000.
d. has no dominant strategy.
MSC: Applicative
74. Barb and Sue are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on
radio, or not at all. If they both advertise on TV, each will earn a profit of $5,000. If they both advertise on ra-
dio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one ad-
vertises on TV and other advertises on radio, then the one advertising on TV will earn $8,000 and the other
will earn $3,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will
earn $15,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then
the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant
strategy, then Barb will
a. advertise on TV and earn $5,000.
b. advertise on radio and earn $7,000.
c. not advertise at all and earn $10,000.
d. None of the above is correct. Barb and Sue do not have dominant strategies.
MSC: Applicative

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75. Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on
radio, or not at all. If they both advertise on TV, each will earn a profit of $4,000. If they both advertise on ra-
dio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one ad-
vertises on TV and other advertises on radio, then the one advertising on TV will earn $6,000 and the other
will earn $5,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will
earn $11,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then
the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant
strategy, then Dave will
c. advertise on TV and earn $11,000.
d. not advertise and earn $10,000.
MSC: Applicative
76. George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise on TV,
on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on
radio, each will earn a profit of $5,000. If neither advertises at all, each will earn a profit of $10,000. If one
advertises on TV and the other advertises on radio, then the one advertising on TV will earn $4,000 and the
other will earn $2,000. If one advertises on TV and the other does not advertise, then the one advertising on
TV will earn $8,000 and the other will earn $5,000. If one advertises on radio and the other does not advertise,
then the one advertising on radio will earn $9,000 and the other will earn $6,000. If both follow their dominant
strategy, then George will
c. advertise on TV and earn $8,000.
d. not advertise and earn $10,000.
MSC: Applicative
77. Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to advertise.
If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit
of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $12,000
and the other will earn $2,000. In this version of the prisoners' dilemma, if the game is played only once, Lau-
rel should
a. advertise, but if the game is to be repeated many times she should probably not advertise.
b. advertise, and if the game is to be repeated many times she should still probably advertise.
c. not advertise, but if the game is to be repeated many times she should probably advertise.
d. not advertise, and if the game is to be repeated many times she should still not advertise.
MSC: Applicative

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Table 17-14
This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff
to A, Payoff to B).
B
Right Left
Up (2, 2) (3, 1)
A
Down (1, 3) (0, 0)
78. Refer to Table 17-14. If player A chooses his/her best strategy, player B should
a. choose right and earn a payoff of 2.
b. choose right and earn a payoff of 3.
c. choose left and earn a payoff of 1.
d. choose left and earn a payoff of 0.
MSC: Applicative
79. Refer to Table 17-14. If both players choose their best strategies, player A will earn a payoff of
a. 0.
b. 1.
c. 2.
d. 3.
MSC: Applicative
80. Refer to Table 17-14. Which of the following statements about this game is true?
a. Up is a dominant strategy for A and Right is a dominant strategy for B.
b. Up is a dominant strategy for A and Left is a dominant strategy for B.
c. Down is a dominant strategy for A and Right is a dominant strategy for B.
d. Down is a dominant strategy for A and Left is a dominant strategy for B.
MSC: Applicative
81. Refer to Table 17-14. Which outcome is the Nash equilibrium in this game?
a. Up-Right
b. Up-Left
c. Down-Right
d. Down-Left
MSC: Applicative

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Table 17-15
This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff
to A, Payoff to B).
B
Left Center Right
Up (1, 4) (6, 2) (3, 1)
A Middle (2, 2) (4, 6) (5, 7)
Down (3, 2) (5, 5) (4, 3)
82. Refer to Table 17-15. If player B chooses Right, player A should choose
a. Up and earn a payoff of 1.
b. Middle and earn a payoff of 5.
c. Middle and earn a payoff of 7.
d. Down and earn a payoff of 4.
MSC: Applicative
83. Refer to Table 17-15. Which of the following statements regarding this game is true?
a. Both players have a dominant strategy.
b. Player A has a dominant strategy, but player B does not have a dominant strategy.
c. Player A does not have a dominant strategy, but player B does have a dominant strategy.
d. Neither player has a dominant strategy.
MSC: Applicative
84. Refer to Table 17-15. Which of the following outcomes represents a Nash equilibrium in the game?
a. Up-Center
b. Middle-Right
c. Down-Left
d. Down-Center
MSC: Applicative
Table 17-16
This table shows a game played between two players, A and B. The payoffs are given in the table as (Payoff to
A, Payoff to B).
B
Left Center Right
Up (8, 4) (4, 10) (6, 6)
A Middle (6, 2) (10, 6) (10, 4)
Down (2, 6) (8, 8) (12, 2)
85. Refer to Table 17-16. Which of the following statements is true regarding this game?
a. Both players have a dominant strategy.
b. Neither player has a dominant strategy.
c. A has a dominant strategy, but B does not have a dominant strategy.
d. B has a dominant strategy, but A does not have a dominant strategy.
MSC: Applicative

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86. Refer to Table 17-16. Which of the following outcomes represents a Nash equilibrium in the game?
a. Middle-Center
b. Down-Center
c. Up-Left
d. More than one of the above is a Nash equilibrium in this game.
MSC: Applicative
Table 17-17
This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide
how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for
Firm A, Profit for Firm B).
Firm B
Q=2 Q=3
Q=2 (10, 10) (8, 12)
Firm A
Q=3 (12, 8) (6, 6)
87. Refer to Table 17-17. In this game,
a. neither player has a dominant strategy.
b. both players have a dominant strategy.
c. Firm A has a dominant strategy, but Firm B does not have a dominant strategy.
d. Firm B has a dominant strategy, but Firm A does not have a dominant strategy.
MSC: Applicative
88. Refer to Table 17-17. Which of the following outcomes represent the Nash equilibrium in this game?
a. Q=2 for Firm A and Q=3 for Firm B.
b. Q=3 for Firm A and Q=2 for Firm B.
c. There is no Nash equilibrium in this game since neither player has a dominant strategy.
d. Both a and b are correct.
NAT: Analytic LOC: Oligopoly TOP: Game theory | Nash equilibrium
MSC: Applicative
Table 17-18
This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide
how much output (Q) to produce: 10 units or 12 units. The profit for each firm is given in the table as (Profit
for Firm A, Profit for Firm B).
Firm B
Q=10 Q=12
Q=10 (48, 48) (20, 60)
Firm A
Q=12 (60, 20) (38, 38)
89. Refer to Table 17-18. The dominant strategy For Firm A is to produce
a. 10 units and the dominant strategy for Firm B is to produce 10 units.
b. 10 units and the dominant strategy for Firm B is to produce 12 units.
c. 12 units and the dominant strategy for Firm B is to produce 10 units.
d. 12 units and the dominant strategy for Firm B is to produce 12 units.
MSC: Applicative

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90. Refer to Table 17-18. The Nash equilibrium for this game is
a. 10 units of output for Firm A and 10 units of output for Firm B.
b. 10 units of output for Firm A and 12 units of output for Firm B.
c. 12 units of output for Firm A and 10 units of output for Firm B.
d. 12 units of output for Firm A and 12 units of output for Firm B.
NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Nash equilibrium
MSC: Applicative
91. Refer to Table 17-18. If these two firms agree to cooperate to maximize their joint profit, the outcome of the
game will be
NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Collusion
MSC: Applicative
92. Refer to Table 17-18. If these two firms play this game repeatedly, the likely outcome will be
NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Collusion
MSC: Applicative
93. The prisoners' dilemma game

a. is a situation in which two players both have dominant strategies which lead to the highest total
payoff for the two players.
b. has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an
incentive to switch to another strategy.
c. has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would
agree to if they could cooperate with each other.
d. Both a and c are correct.
MSC: Interpretive
94. In a prisoners' dilemma game,

a. the solution when playing the game once will be the same as the solution when the players play the
game repeatedly, since agreements cannot be maintained in a prisoners' dilemma.
b. if the players play the game repeatedly, the players can achieve a higher payoff, on average, than
when they play the game only once.
c. repeated play will always result in a better outcome for both players than when the game is played
only once.
d. the tit-for-tat strategy in repeated play requires players to always select the opposite strategy as
their opponent.
MSC: Interpretive

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Table 17-19
Consider a small town that has two grocery stores from which residents can choose to buy a gallon of milk.
The store owners each must make a decision to set a high milk price or a low milk price. The payoff table,
showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2).
Store 2
Low Price High Price
Low Price (500, 500) (800, 100)
Store 1
High Price (100, 800) (650, 650)
95. Refer to Table 17-19. If grocery store 2 sets a low price, what price should grocery store 1 set? And what will
grocery store 1's payoff equal?
a. Low price, $500
b. High price, $800
c. Low price, $100
d. High price, $100
MSC: Applicative
96. Refer to Table 17-19. If grocery store 2 sets a high price, what price should grocery store 1 set? And what
will grocery store 1's payoff equal?
a. Low price, $800
b. High price, $650
c. Low price, $100
d. High price, $800
MSC: Applicative
97. Refer to Table 17-19. If grocery store 1 sets a low price, what price should grocery store 2 set? And what will
grocery store 2's payoff equal?
a. Low price, $500
b. High price, $800
c. Low price, $100
d. High price, $650
MSC: Applicative
98. Refer to Table 17-19. If grocery store 1 sets a high price, what price should grocery store 2 set? And what
will grocery store 2's payoff equal?
a. Low price, $800
b. High price, $100
c. Low price, $500
d. High price, $650
MSC: Applicative
99. Refer to Table 17-19. What is grocery store 1's dominant strategy?
a. Grocery store 1 does not have a dominant strategy.
b. Grocery store 1 should always set a low price.
c. Grocery store 1 should always set a high price.
d. Grocery store 1 should set a low price when grocery store 2 sets a low price, and grocery store 1
should set a high price when grocery store 2 sets a high price.
MSC: Applicative

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100. Refer to Table 17-19. What is grocery store 2's dominant strategy?
a. Grocery store 2 does not have a dominant strategy.
b. Grocery store 2 should always set a low price.
c. Grocery store 2 should always set a high price.
d. Grocery store 2 should set a low price when grocery store 1 sets a low price, and grocery store 2
should set a high price when grocery store 1 sets a high price.
MSC: Applicative
101. Refer to Table 17-19. What is the Nash Equilibrium of this price-setting game?
a. Grocery store 1: Low price
Grocery store 2: Low price
b. Grocery store 1: Low price
Grocery store 2: High price
c. Grocery store 1: High price
Grocery store 2: How price
d. Grocery store 1: High price
Grocery store 2: High price
MSC: Applicative
Table 17-20
Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm room, but
neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm
room's common space. The payoff table for this situation is provided below, where the higher a player’s
payoff number, the better off that player is. The payoffs in each cell are shown as (payoff for Nadia, payoff for
Maddie).
Maddie
Clean Don’t Clean
Clean (30, 30) (7, 50)
Nadia
Don’t Clean (50, 7) (10, 10)
102. Refer to Table 17-20. If Maddie chooses to clean, then Nadia will
a. clean and Maddie’s payoff will be 30.
b. not clean and Maddie’s payoff will be 7.
c. clean and Maddie’s payoff will be 50.
d. not clean and Maddie’s payoff will be 10.
MSC: Applicative
103. Refer to Table 17-20. If Maddie chooses not to clean, then Nadia will
a. clean, and Nadia’s payoff will be 50.
b. not clean, and Nadia’s payoff will be 10.
c. clean, and Nadia’s payoff will be 7.
d. not clean, and Nadia’s payoff will be 30.
MSC: Applicative

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104. Refer to Table 17-20. If Nadia chooses to clean, then Maddie will
a. clean, and Maddie’s payoff will be 30.
b. not clean, and Maddie’s payoff will be 50.
c. clean, and Maddie’s payoff will be 7.
d. not clean, and Maddie’s payoff will be 10.
MSC: Applicative
105. Refer to Table 17-20. If Nadia chooses to not clean, then Maddie will
a. clean, and Maddie’s payoff will be 10.
b. not clean, and Maddie’s payoff will be 50.
c. clean, and Maddie’s payoff will be 30.
d. not clean, and Maddie’s payoff will be 10.
MSC: Applicative
106. Refer to Table 17-20. What is Nadia's dominant strategy?
a. Nadia has no dominant strategy.
b. Nadia should always choose Clean.
c. Nadia should always choose Don’t Clean.
d. Nadia has two dominant strategies, Clean and Don’t Clean, depending on the choice Maddie
makes.
MSC: Applicative
107. Refer to Table 17-20. What is Maddie's dominant strategy?
a. Maddie has no dominant strategy.
b. Maddie should always choose Clean.
c. Maddie should always choose Don’t Clean.
d. Maddie has two dominant strategies, Clean and Don’t Clean, depending on the choice Nadia
makes.
MSC: Applicative
108. Refer to Table 17-20. What is the Nash Equilibrium in this dorm room cleaning game?
a. Nadia: Clean
Maddie: Clean
b. Nadia: Don't Clean
Maddie: Clean
c. Nadia: Clean
Maddie: Don't Clean
d. Nadia: Don't Clean
Maddie: Don't Clean
MSC: Applicative

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Figure 17-2. Hector and Bart are roommates. On a particular day, their apartment needs to be cleaned. Each
person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be
completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate
cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes
are as follows:
Hector's Decision
Clean Don't clean
Hector's happiness = 6 Hector's happiness = 10
Clean
Bart's happiness = 7 Bart's happiness = 2

Bart's
Decision
Hector's happiness = 2 Hector's happiness = 5
Don't clean
Bart's happiness = 10 Bart's happiness = 4
109. Refer to Figure 17-2. The dominant strategy for Hector is to

a. clean, and the dominant strategy for Bart is to clean.
b. clean, and the dominant strategy for Bart is to refrain from cleaning.
c. refrain from cleaning, and the dominant strategy for Bart is to clean.
d. refrain from cleaning, and the dominant strategy for Bart is to refrain from cleaning.
MSC: Applicative
110. Refer to Figure 17-2. In pursuing his own self-interest, Bart will
a. refrain from cleaning whether or not Hector cleans.
b. clean only if Hector cleans.
c. clean only if Hector refrains from cleaning.
d. clean whether or not Hector cleans.
MSC: Applicative
a. Hector and Bart both clean.
b. Hector cleans and Bart does not clean.
c. Bart cleans and Hector does not clean.
d. neither Hector nor Bart cleans.
MSC: Applicative

lOMoARcPSD|34872551
112. Refer to Figure 17-2. In pursuing his own self-interest, Hector will
a. refrain from cleaning whether or not Bart cleans.
b. clean only if Bart cleans.
c. clean only if Bart refrains from cleaning.
d. clean whether or not Bart cleans.
MSC: Applicative
113. Refer to Figure 17-2. The possible outcome in which both Hector and Bart clean is analogous to which of the
following outcomes of the duopoly game?
a. The duopolists collude to achieve the monopoly outcome.
b. The duopolists collude to achieve the monopolistically-competitive outcome.
c. The outcome is the one that is most preferable for consumers of the duopolists’ product.
d. The outcome is the one that is least preferable for both the duopolists and for the consumers of their
product.
MSC: Applicative
Figure 17-3. Katie and Taylor are roommates. On a particular day, their lawn needs to be mowed. Each person has
to decide whether to take part in mowing the lawn. At the end of the day, either the lawn will be mowed (if
one or both roommates take part in mowing), or it will remain unmowed (if neither roommate mows). With
happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows:
Katie's Decision
Mow Don't mow
Katie's happiness = 7 Katie's happiness = 10
Mow
Taylor's happiness = 7 Taylor's happiness = 2

Taylor's
Decision
Katie's happiness = 5 Katie's happiness = 4
Don't mow
Taylor's happiness = 8 Taylor's happiness = 4
114. Refer to Figure 17-3. The dominant strategy for Taylor is to

a. mow, and the dominant strategy for Katie is to mow.
b. mow, and the dominant strategy for Katie is to refrain from mowing.
c. refrain from mowing, and the dominant strategy for Katie is to mow.
d. refrain from mowing, and there is no dominant strategy for Katie.
MSC: Applicative

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115. Refer to Figure 17-3. If this game is played only once, then which of the following outcomes is the most
likely one?
a. Katie and Taylor both mow.
b. Katie mows and Taylor does not mow.
c. Taylor mows and Katie does not mow.
d. All of the above outcomes are equally likely.
MSC: Applicative
116. Refer to Figure 17-3. In pursuing her own self-interest, Taylor will
a. refrain from mowing whether or not Katie mows.
b. mow only if Katie mows.
c. mow only if Katie refrains from mowing.
d. mow whether or not Katie mows.
MSC: Applicative
117. Refer to Figure 17-3. In pursuing her own self-interest, Katie will
a. refrain from mowing whether or not Taylor mows.
b. mow only if Taylor mows.
c. mow only if Taylor refrains from mowing.
d. mow whether or not Taylor mows.
MSC: Applicative
Table 17-21
The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other.
John and Paul have a common interest to avoid crashing into each other, but they also have a personal,
competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff
table for this situation is provided below. The payoffs are shown as (John, Paul).
Paul
Turn Drive Straight
Turn (10, 10) (5, 20)
John
Drive Straight (20, 5) (0, 0)
118. Refer to Table 17-21. If Paul chooses Turn, what will John choose to do and what will John’s payoff equal?
a. Turn, 10
b. Drive Straight, 20
c. Turn, 5
d. Drive Straight, 0
MSC: Applicative
119. Refer to Table 17-21. If Paul chooses Drive Straight, what will John choose to do and what will John’s payoff
equal?
a. Turn, 5
c. Turn, 20
MSC: Applicative

lOMoARcPSD|34872551
120. Refer to Table 17-21. If John chooses Turn, what will Paul choose to do and what will Paul's payoff equal?
a. Turn, 10
c. Turn, 5
MSC: Applicative
121. Refer to Table 17-21. If John chooses Drive Straight, what will Paul choose to do and what will Paul's payoff
equal?
a. Turn, 5
c. Turn, 10
MSC: Applicative
122. Refer to Table 17-21. What is Paul's dominant strategy?
a. Paul has no dominant strategy.
b. Paul should always choose Turn.
c. Paul should always choose Drive Straight.
d. Paul has more than one dominant strategy.
MSC: Applicative
123. Refer to Table 17-21. What is John's dominant strategy?
a. John has no dominant strategy.
b. John should always choose Turn.
c. John should always choose Drive Straight.
d. John has two dominant strategies.
MSC: Applicative
124. Refer to Table 17-21. How many Nash equilibria are there in this Chicken game?
a. 0
b. 1
c. 2
d. 3
MSC: Applicative
125. Refer to Table 17-21. What is (are) the Nash equilibrium (equilibria) in this Chicken game?
a. John: Turn
Paul: Turn
b. John: Turn
Paul: Drive Straight
c. John: Drive Straight
Paul: Turn
d. Both b and c are Nash equilibria
MSC: Applicative

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126. In the prisoners’ dilemma,

a. the prisoners easily collude in order to achieve the best possible payoff for both.
b. only one player has a dominant strategy.
c. when each player chooses his dominant strategy the players achieve the best joint outcome.
d. when each player chooses his dominant strategy the players reach a Nash equilibrium.
MSC: Analytical
127. In the game in which two oil companies own adjacent oil fields, the companies will not use the oil efficiently
because
a. neither company has a dominant strategy in the game.
b. the companies collude and produce a quantity of oil that is less than the socially-efficient quantity.
c. the pool from which they recover the oil is a common resource.
d. the pool from which they recover the oil is not large enough to allow both companies to earn a
positive profit.
MSC: Interpretive
128. An equilibrium occurs in a game when

a. price equals marginal cost.
b. quantity supplied equals quantity demanded.
c. all independent strategies counterbalance all dominant strategies.
d. all players follow a strategy that they have no incentive to change.
MSC: Interpretive
129. The players in a two-person game are choosing between Strategy X and Strategy Y. If the second player
chooses Strategy X, the first player's best outcome is to select X. If the second player chooses Strategy Y, the
first player's best outcome is to select X. For the first player, Strategy X is called a
a. dominant strategy.
b. collusive strategy.
c. repeated-trial strategy.
d. cartel strategy.
MSC: Applicative
130. Suppose that two poker players believe that they are superior players to the rest of the people at their table.
Further suppose that the two players make an agreement to concede hands to each other in order to drive the
other players from the game first. Economists would model such behavior as
a. monopolistic competition.
b. game theory.
c. predatory pricing.
d. a dominant strategy.
MSC: Applicative

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131. After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline due, in part,
to
a. the low elasticity of demand for oil in the short run.
b. the large number of buyers from each member nation.
c. surging demand for oil in the early 1980s.
d. OPEC members failing to produce their agreed-upon production levels.
Table 17-22
Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for
repair work and a high price. The annual economic profit from each strategy is indicated in the table. The
profits are shown as (Matt, Brian) in each cell.
Brian
Low Price High Price
Low Price (1500, 1500) (5000, 200)
Matt
High Price (200, 3000) (4000, 4000)
132. Refer to Table 17-22. Which of the following statements is correct?
a. Matt's dominant strategy is to charge a low price.
b. Brian's dominant strategy is to charge a high price.
c. The dominant strategy for both Brian and Matt is to charge a low price.
d. Matt's dominant strategy is to charge a high price.
MSC: Applicative
133. Refer to Table 17-22. Which of the following statements is correct if Brian and Matt will play this game only
once?
a. The Nash equilibrium is the high price.
b. A Nash equilibrium cannot be established unless Brian and Matt collude.
c. A Nash equilibrium cannot be established without the players repeating the game.
d. The Nash equilibrium price is the low price.
MSC: Applicative

lOMoARcPSD|34872551
Table 17-23
Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and
thus increase their profits, if they reduced their advertising budgets. But in order for the plan to work, each
firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the
demand for the firm’s product, but each firm also believes that if neither firm advertises, the costs savings will
outweigh the lost sales. Listed in the table below are the individual profits for each firm.
Firm A
Breaks the agreement Maintains the agreement and
and advertises does not advertise
Breaks the agreement Firm A profit = $9,000 Firm A profit = $8,000
and advertises Firm B profit = $4,000 Firm B profit = $6,000
Firm B
Maintains the agreement Firm A profit = $11,000 Firm A profit = $10,000
and does not advertise Firm B profit = $3,500 Firm B profit = $5,000
134. Refer to Table 17-23. Suppose that the two firms, A and B, make an agreement to withhold any
advertising for one month in order to lower each firm’s costs and raise each firm’s profits. If the firms reach
the Nash equilibrium,
a. both firms will choose not to advertise.
b. firm A will choose not to advertise, but firm B will break the agreement and choose to advertise.
c. firm B will choose not to advertise, but firm A will break the agreement and choose to advertise.
d. both firms will break the agreement and choose to advertise.
MSC: Analytical
135. Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm A earn?
a. $8,000 because firm A will maintain the agreement not to advertise, but firm B will break the
agreement and choose to advertise.
b. $9,000 because each firm will break the agreement and choose to advertise.
c. $10,000 because each firm will maintain the agreement and choose not to advertise.
d. $11,000 because firm B will maintain the agreement not to advertise, but firm A will break the
MSC: Analytical
136. Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm B earn?
a. $3,500 because firm B will maintain the agreement not to advertise, but firm A will break the
b. $4,000 because each firm will break the agreement and choose to advertise.
c. $5,000 because each firm will maintain the agreement and choose not to advertise.
d. $6,000 because firm A will maintain the agreement not to advertise, but firm B will break the
MSC: Analytical

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137. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the
two players and good for society?
a. Two guilty criminals have been captured by the police, and each prisoner decides whether to
confess or to remain silent.
b. Two airlines dominate air travel between City A and City B, and each airline decides whether to
charge a “high” airfare or a “low” airfare.
c. Two duopoly firms account for all of the production in a market, and each firm decides whether to
produce a “high” amount of output or a “low” amount of output.
d. Two oil companies own adjacent oil fields over a common pool of oil, and each company decides
whether to drill one well or two wells.
MSC: Interpretive
138. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the
two players and bad for society?
a. Two oil companies own adjacent oil fields over a common pool of oil, and each company decides
whether to drill one well or two wells.
b. Two airlines dominate air travel between City A and City B, and each airline decides whether to
charge a “high” airfare or a “low” airfare on flights between those two cities.
c. Two superpowers decide whether to build new weapons or to disarm.
d. In all of the above cases, the cooperative outcome of the game is good for the two players and bad
for society
MSC: Interpretive
Table 17-24
Two firms are considering going out of business and selling their assets. Each considers what happens if the
other goes out of business. The payoff matrix below shows the net gain or loss to each firm.
Firm A
Stays in business Sells business
A gains $9 million A gains $7 million
Stays in business
B gains $7million B gains $15 million
Firm B
A gains $15 million A gains $1 million
Sells business
B gains $8 million B gains $3 million
139. Refer to Table 17-24. Which firm’s dominant strategy is to sell?
a. firm A’s and firm B’s
b. firm A’s but not firm B’s
c. firm B’s but not firm A’s
d. neither firm A’s nor firm B’s
MSC: Analytical
140. Refer to Table 17-24. Which firms have a dominant strategy?
a. A and B
b. Neither A nor B
c. A but not B
d. B but not A
MSC: Analytical

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141. Refer to Table 17-24. What is the Nash equilibrium?

a. A and B both stay in business
b. A stays in business, B sells
c. B stays in business, A sells
d. Both A and B sell
MSC: Analytical
Table 17-25
There are just two producers of a certain product. Each is considering offering promotional discounts.
Firm A
Does not offer discount Offers discount
Firm A profit = $90,000 Firm A profit = $120,000
Does not offer discount
Firm B profit = $90,000 Firm B profit = $70,000
Firm B
Firm A profit = $70,000 Firm A profit = $80,000
Offers discount
Firm B profit = $120,000 Firm B profit = $80,000
142. Refer to Table 17-25. The dominant strategy
a. for both firms is to offer the discount.
b. for both firms is to not offer the discount.
c. for firm A is to offer the discount. The dominant strategy for firm B is to not offer the discount.
d. for firm A is to not offer the discount. The dominant strategy for firm B is to offer the discount.
MSC: Analytical
143. Refer to Table 17-25. At the Nash equilibrium, how much profit will Firm A earn?
a. $120,000
b. $90,000
c. $80,000
d. $70,000
MSC: Analytical
144. Which of the following is correct? When oligopolies collude

a. they make higher profits and consumers of the product are better off.
b. they make higher profits but consumers of the product are worse off.
c. they make lower profits and consumers of the product are better off.
d. they make lower profits and consumers of the product are worse off.
NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Applicative

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Figure 17-4. Two companies, Acme and Bilco, are sellers in the same market. Each company decides whether to
charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual
profits for the two companies.
Acme's Decision
High price Low price
Acme's profit = $5 million Acme's profit = $7 million
High price
Bilco's profit = $5 million Bilco's profit = $2 million

Bilco's
Decision
Acme's profit = $2 million Acme's profit = $3.25 million
Low price
Bilco's profit = $7 million Bilco's profit = $3.25 million
145. Refer to Figure 17-4. Suppose the outcome of the game is one in which Acme’s profit is $2 million and Bil-
co’s profit is $7 million. The most likely explanation for this outcome is that
a. each company pursued its dominant strategy.
b. each company’s objective was to maximize the sum of the two companies’ profits.
c. the two companies reached an agreement on what price to charge, and Acme subsequently cheated.
d. the two companies reached an agreement on what price to charge, and Bilco subsequently cheated.
MSC: Applicative
146. Refer to Figure 17-4. If the two companies make their pricing decisions independently, then it is likely that
Acme will
a. charge a high price only if Bilco charges a high price.
b. charge a high price only if Bilco charges a low price.
c. charge a high price regardless of whether Bilco charges a high price or a low price.
MSC: Applicative
147. Refer to Figure 17-4. If the two companies make their pricing decisions independently, then it is likely that
Bilco will
a. charge a low price only if Acme charges a low price.
b. charge a low price only if Acme charges a high price.
c. charge a low price regardless of whether Acme charges a high price or a low price.
MSC: Applicative

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a. both firms charge a low price.
b. Acme charges a low price and Bilco charges a high price.
c. Acme charges a high price and Bilco charges a low price.
d. both firms charge a high price.
MSC: Applicative
149. Refer to Figure 17-4. The dominant strategy for Acme is to

a. charge a high price, and the dominant strategy for Bilco is to charge a high price.
b. charge a high price, and the dominant strategy for Bilco is to charge a low price.
c. charge a low price, and the dominant strategy for Bilco is to charge a high price.
d. charge a low price, and the dominant strategy for Bilco is to charge a low price.
MSC: Applicative
150. Refer to Figure 17-4. Suppose we observe that the outcome of the game is one in which each company earns
a profit of $5 million. This outcome
a. is the result of each company pursuing its dominant strategy.
b. is the result of cooperation between the two companies, and we know that a cooperative outcome is
easy in a game such as this one.
c. is the result of cooperation between the two companies, and we know that a cooperative outcome is
difficult in a game such as this one.
d. is the most likely outcome of the game, regardless of whether the two companies cooperate.
NAT: Analytic LOC: Oligopoly TOP: Game theory | Cooperation
MSC: Applicative
151. Refer to Figure 17-4. The situation faced by Acme and Bilco is
a. one in which the players, pursuing their own interests, are likely to reach an outcome that is not
particularly good for either player.
b. one in which an agreement between the players to behave in a certain way is not likely to hold up.
c. similar to the situation faced by Bonnie and Clyde in the prisoners’ dilemma game.
NAT: Analytic LOC: Oligopoly TOP: Game theory | Prisoners' dilemma
MSC: Applicative
152. Refer to Figure 17-4. In what sense is the game involving Acme and Bilco similar to the prisoners’ dilemma
game involving Bonnie and Clyde?
a. In both games, if the players pursue their own interests, then the outcome is the best possible
outcome for each player.
b. In both games, a dominant strategy can be identified for each player.
c. In both games, cooperation between the players is easy to maintain.
MSC: Applicative

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153. A cooperative agreement among oligopolists is more likely to be maintained,

a. the greater the number of oligopolists.
b. the larger the number of buyers of the oligopolists’ product.
c. the smaller the number of buyers of the oligopolists’ product.
d. the more likely it is that the game among the oligopolists will be played over and over again.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Game theory
MSC: Interpretive
154. A cooperative agreement among oligopolists is less likely to be maintained,

a. the greater the number of oligopolists.
b. the larger the number of buyers of the oligopolists’ product.
c. the smaller the number of buyers of the oligopolists’ product.
d. the more likely it is that the game among the oligopolists will be played over and over again.
MSC: Interpretive
PUBLIC POLICY TOWARD OLIGOPOLIES
1. From society’s standpoint, cooperation among oligopolists is

a. desirable, because it leads to less conflict among firms and a wider variety of products for
consumers.
b. desirable, because it leads to an outcome closer to the competitive outcome than what would be
observed in the absence of cooperation.
c. undesirable, because it leads to output levels that are too low and prices that are too high.
d. undesirable, because it leads to output levels that are too high and prices that are too high.
NAT: Analytic LOC: Oligopoly TOP: Cooperation | Oligopoly
MSC: Interpretive
2. A law that encourages market competition by prohibiting firms from gaining or exercising excessive market
power is
a. a patent.
b. impossible to enforce.
c. an antitrust law.
d. an externality law.
NAT: Analytic LOC: The role of government TOP: Antitrust
MSC: Definitional
3. The primary purpose of antitrust legislation is to

a. protect small businesses.
b. protect the competitiveness of U.S. markets.
c. protect the prices of American-made products.
d. ensure firms earn only a fair profit.
MSC: Interpretive

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4. To move the allocation of resources closer to the social optimum, policymakers should typically try to induce
firms in an oligopoly to
a. collude with each other.
b. form various degrees of cartels.
c. compete rather than cooperate with each other.
d. cooperate rather than compete with each other.
NAT: Analytic LOC: The role of government TOP: Economic welfare
MSC: Interpretive
5. Which of the following statements is true?

a. The proper scope of antitrust laws is well defined and definite.
b. Antitrust laws focus on granting certain firms the option to form a cartel.
c. Policymakers have the difficult task of determining whether some firms' decisions have legitimate
purposes even though they appear anti-competitive.
d. There is always a need for policymakers to try to limit a firm's pricing power, regardless of whether
the firm's market is competitive, a monopoly, or an oligopoly.
MSC: Interpretive
6. Which of the following is necessarily a problem with antitrust laws?

a. They may target a business whose practices appear to be anti-competitive but in fact have
legitimate purposes.
b. They promote competition.
c. They limit monopoly power.
d. They prohibit firms from entering or exiting a market.
MSC: Interpretive
7. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws?
a. the U.S. Justice Department
b. private citizens
c. corporations
MSC: Interpretive
8. Which government entity is charged with investigating and enforcing antitrust laws?
a. the U.S. Justice Department
b. the U.S. Commerce Department
c. the U.S. Treasury Department
d. the Bureau of Alcohol, Tobacco, and Firearms
MSC: Interpretive
9. Who wrote, "People of the same trade seldom meet together, but the conversation ends in a conspiracy against
the public, or in some diversion to raise prices."?
a. Thomas Jefferson
b. Adam Smith
c. Bill Gates
d. Robert Axelrod

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10. The Sherman Antitrust Act

a. was passed to encourage judicial leniency in the review of cooperative agreements.
b. was concerned with self-interest dominated Nash equilibriums in prisoners' dilemma games.
c. enhanced the ability to enforce cartel agreements.
d. restricted the ability of competitors to engage in cooperative agreements.
MSC: Interpretive
11. The Sherman Act made cooperative agreements

a. unenforceable outside of established judicial review processes.
b. enforceable with proper judicial review.
c. a criminal conspiracy.
d. a crime, but did not give direction on possible penalties.
MSC: Interpretive
12. The Sherman Antitrust Act was passed in

a. 1836.
b. 1890.
c. 1914.
d. 1946.
MSC: Definitional
13. The Sherman Antitrust Act prohibits price-fixing in the sense that
a. competing executives cannot even talk about fixing prices.
b. competing executives can talk about fixing prices, but they cannot take action to fix prices.
c. a price-fixing agreement can lead to prosecution provided the government can show that the public
was not well-served by the agreement.
d. None of the above is correct. The Sherman Act did not address the matter of price-fixing.
MSC: Interpretive
14. The Sherman Antitrust Act prohibits executives of competing companies from
a. fixing prices, but it does not prohibit them from talking about fixing prices.
b. even talking about fixing prices.
c. sharing with one another their knowledge of game theory.
d. failing to stand by agreements that they had made with one another.
MSC: Interpretive
15. The Sherman Antitrust Act

a. overturned centuries-old views of English and American judges on agreements among competitors.
b. had the effect of discouraging private lawsuits against conspiring oligopolists.
c. strengthened the Clayton Act.
d. elevated agreements among conspiring oligopolists from an unenforceable contract to a criminal
conspiracy.
MSC: Interpretive

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16. Which of the following prohibits executives of competing firms from even talking about fixing prices?
a. Sherman Act
b. Clayton Act
c. Federal Trade Commission
d. U.S. Justice Department
MSC: Interpretive
17. Two CEOs from different firms in the same market collude to fix the price in the market. This action violates
the
a. Clayton Act of 1914.
b. Sherman Antitrust Act of 1890.
c. Crandall-Putnam ruling of 1983.
d. Jackson-Microsoft ruling of 2000.
MSC: Interpretive
18. The Clayton Act

a. preceded the Sherman Act.
b. replaced the Sherman Act.
c. strengthened the Sherman Act.
d. was specifically designed to reduce the ability of cartels to organize.
MSC: Interpretive
19. According to the Clayton Act,

a. lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.
b. individuals can sue to recover damages from illegal cooperative agreements.
c. the government was able to incarcerate the CEO of a firm for illegal pricing arrangements.
d. private lawsuits are discouraged.
MSC: Interpretive
20. If a person can prove that she was damaged by an illegal arrangement to restrain trade, that person can sue and
recover
a. the damages she sustained, as provided for in the Sherman Act.
b. the damages she sustained, as provided for in the Clayton Act.
c. three times the damages she sustained, as provided for in the Sherman Act.
d. three times the damages she sustained, as provided for in the Clayton Act.
MSC: Interpretive

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21. Which of the following statements is false?

a. The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against
conspiring oligopolists.
b. Many economists defend the practice of resale price maintenance on the grounds that it may help
solve a free-rider problem.
c.
Most economists agree that predatory pricing is a profitable business strategy that usually preserves
market power.
d. The U.S. Supreme Court's view that the practice of tying usually allows a firm to extend its market
power is not generally supported by economic theory.
NAT: Analytic LOC: Oligopoly TOP: Predatory pricing
MSC: Interpretive
22. When individuals are damaged by an illegal arrangement to restrain trade, which law allows them to pursue
civil action and recover up to three times the damages sustained?
a. Trade Damage Act
b. Clayton Act
c. Sherman Act
d. No law allows individuals to pursue civil action and recover up to three times the damages
sustained.
MSC: Interpretive
23. The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to
a. sue for up to two times the damages they incurred.
b. sue for up to three times the damages they incurred.
c. sue for up to four times the damages they incurred.
d. sue for damages, but only for the actual amount of damages they incurred.
MSC: Definitional
24. Antitrust laws in general are used to

a. prevent oligopolists from acting in ways that make markets less competitive.
b. encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
c. encourage frivolous lawsuits among competitive firms.
d. encourage all firms to cut production levels and cut prices.
MSC: Interpretive
25. The practice of selling a product to retailers and requiring the retailers to charge a specific price for the prod-
uct is called
a. fixed retail pricing.
b. resale price maintenance.
c. cost plus pricing.
d. unfair trade.
NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance
MSC: Definitional

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26. Economists claim that a resale price maintenance agreement is not anti-competitive because
a. suppliers are never able to exercise noncompetitive market power.
b. if a supplier has market power, it will be likely to exert that power through wholesale price rather
than retail price.
c. retail markets are inherently noncompetitive.
d. retail cartel agreements cannot increase retail profits.
MSC: Interpretive
27. Assume that Peach Computers has entered into a resale price maintenance agreement with Computer Super
Stores Inc. (CSS Inc.) but not with CompuMart. In this case,
a. the wholesale price of Peach computers will be different for CSS Inc. than it is for CompuMart.
b. Peach computers will never increase profits by having a resale price maintenance agreement with
all retail outlets that sell its products.
c. CompuMart might benefit from customers who go to CSS Inc. for information about different
computers.
d. CSS Inc. will sell Peach computers at a lower price than CompuMart.
MSC: Interpretive
28. Assume that Apple Computer has entered into an enforceable resale price maintenance agreement with Com-
puter Super Stores Inc. (CSS Inc.) and Wal-Mart. Which of the following will always be true?
a. The wholesale price of Apple computers will be different for CSS Inc. than it is for Wal-Mart.
b. Wal-Mart will benefit from customers who go to CSS Inc. for information about different
computers.
c. CSS Inc. will sell Apple computers at a lower price than Wal-Mart.
d. Wal-Mart and CSS Inc. will always sell Apple Computers for exactly the same price.
MSC: Interpretive
29. A firm that practices resale price maintenance

a. has incentive to reduce competition between its retailers. Resale price maintenance can lead to
more service.
b. has incentive to reduce competition between its retailers. Resale price maintenance cannot lead to
more service.
c. has no incentive to reduce competition between its retailers. Resale price maintenance can lead to
more service.
d. has no incentive to reduce competition between its retailers. Resale price maintenance cannot lead
to more service.
MSC: Interpretive
30. Resale price maintenance involves a firm

a. colluding with another firm to restrict output and raise prices.
b. selling two individual products together for a single price rather than selling each product
individually at separate prices.
c. temporarily cutting the price of its product to drive a competitor out of the market.
d. requiring that the firm reselling its product do so at a specified price.
MSC: Definitional

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31. The manufacturer of Bozz Radios sells radios to retail stores for $500 each, and it requires the retail stores to
charge customers $550 per radio. Any retailer that charges less than $550 would violate its contract with Bozz
Radios. What do economists call this business practice?
a. predatory pricing
b. resale price maintenance
c. tying
d. leverage
MSC: Interpretive
32. If Levi Strauss & Co. were to require every retailer that carried its clothing to charge customers $42 for each
pair of jeans, Levi Strauss & Co. would be practicing
a. resale price maintenance.
b. fixed retail pricing.
c. tying.
d. cost plus pricing.
MSC: Interpretive
33. Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to charge custom-
ers $500 for the computers, then it is engaging in
b. predatory pricing.
c. tying.
d. monopolistic competition.
MSC: Definitional
34. Predatory pricing refers to

a. a firm selling certain products together rather than separately.
b. a monopoly firm reducing its price in an attempt to maintain its monopoly.
c. firms colluding to set prices.
d. All of the above are examples of predatory pricing.
MSC: Analytical
35. Predatory pricing occurs when a firm

a. exercises its oligopoly power by raising its price through the formation of a cartel.
b. exercises its monopoly power by raising its price.
c. cuts its prices in order make itself more competitive.
d. cuts its prices temporarily in order to drive out any competition.
MSC: Definitional

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36. Although the practice of predatory pricing is a common claim in antitrust suits, some economists are skeptical
of this argument because they believe
a. the evidence of its practice is nearly impossible to collect.
b.
predatory pricing is not a profitable business strategy.
c.
even though predatory pricing is a profitable business strategy, it is on balance beneficial to society.
d. predatory pricing actually attracts new firms to the industry.
NAT: Analytic LOC: The role of government TOP: Predatory pricing
MSC: Interpretive
37. Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result,
Firm A lowers its price to try to drive Firm B out of the market. This practice is known as
b. predatory tying.
c. tying.
d. predatory pricing.
MSC: Interpretive
38. Which of the following questions about predatory pricing remains unresolved?
a. Are the courts capable of determining which price cuts are competitive and which are predatory?
b. Are the courts capable of determining which price cuts are good for consumers?
c.
Is predatory pricing ever a profitable business strategy?
d. All of the above questions about predatory pricing are unresolved.
MSC: Interpretive
39. Predatory pricing occurs when

a. firms collude to set prices. Economists are certain this practice is profitable.
b. firms collude to set prices. Economists are skeptical that this practice is profitable.
c. A monopolist decreases its prices to maintain its monopoly. Economists are certain this practice is
profitable.
d. A monopolist decreases its prices to maintain its monopoly. Economists are skeptical that this
practice is profitable.
MSC: Interpretive
40. Predatory pricing involves a firm

MSC: Definitional

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41. The practice of requiring someone to buy two or more items together, rather than separately, is called
a. resale maintenance.
b. product fixing.
c. tying.
d. free-riding.
NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Definitional
42. The practice of tying is illegal on the grounds that

a. it allows firms to expand their market power.
b. it allows firms to form collusive arrangements.
c. it prevents firms from forming collusive agreements.
d. the Sherman Act explicitly prohibited such agreements.
NAT: Analytic LOC: The role of government TOP: Tying
MSC: Interpretive
43. Tying involves a firm

44. The argument that consumers will not be willing to pay any more for two items sold as one than they would
for the two items sold separately is used to justify the legality of which of the following?
a. resale price maintenance
b. tying
c. predatory pricing
d. free-riding
NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Interpretive
45. The practice of tying is used to

a. enhance the enforcement of antitrust laws.
b. encourage the enforcement of collusive agreements.
c. control the retail price of a collection of related products.
d. package products to sell at a combined price closer to a buyer's total willingness to pay.

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Scenario 17-5
Assume that a local bank sells two services, checking accounts and ATM card services. The bank’s only two
customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to
service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to
pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that
the bank can provide each of these services at zero marginal cost.
46. Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to charge for a
checking account?
a. $13
b. $9
c. $8
d. $5
NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Applicative
47. Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to charge for
unlimited use of an ATM card?
a. $14
b. $11
c. $9
d. $2
48. Refer to Scenario 17-5. If the bank is able to use tying to price checking account and ATM services, what is
the profit-maximizing price to charge for the "tied" good?
a. $14
b. $10
c. $9
d. $8
49. Refer to Scenario 17-5. How much additional profit can the bank earn by switching to the use of a tying strat-
egy to price checking accounts and ATM service rather than pricing these services separately?
a. $14
b. $11
c. $7
d. $1
50. A particular cable TV company requires a household to subscribe to its high-speed Internet service if it sub-
scribes to cable TV, and vice versa. This practice
a. is referred to as tying.
b. is regarded by some economists as a form of price discrimination.
c. is controversial among economists because they disagree on whether it has adverse effects for
society as a whole.

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51. Suppose that Makemoney Movies produces two new films — The Hulk and The Piano. Makemoney offers
theaters the two films together at a single price but will not supply the movies separately. What do economists
call this business practice?
a. predatory pricing
b. resale price maintenance
c. tying
d. leverage
52. OPEC is able to raise the price of its product by

a. tying.
b. setting production levels for each of its members.
c. increasing the supply of oil above the competitive level.
d. imposing resale price maintenance agreements on members.
53. All cartels are inherently reliant on

a. a horizontal demand curve.
b. an inelastic demand for their product.
c. the cooperation of their members.
d. enforcement of antitrust laws.
54. In 1971, Congress passed a law that banned cigarette advertising on television. After the ban it is most likely
that the
(i) profits of cigarette companies increased.
(ii) prices of cigarettes increased.
(iii) total costs incurred by cigarette companies increased.
a. (i) only
b. (i) and (ii)
c. (ii) and (iii)
NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Applicative
55. A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet browser into
its Windows operating system, to be sold as one unit. This practice is known as
a. tying.
b. predation.
c. wholesale maintenance.
d. retail maintenance.
NAT: Analytic LOC: The role of government TOP: Tying
MSC: Interpretive

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56. In the U.S. government’s 1998 suit against the Microsoft Corporation, a central issue was whether Microsoft
should be allowed to integrate its Internet browser into its Windows operating system. Microsoft responded
that
a.
this integration of products is an example of tying, and the U.S. Supreme Court has consistently
ruled that tying is a perfectly acceptable and legal business practice.
b.
this integration of products is an example of resale price maintenance, and the U.S. Supreme Court
has consistently ruled that fair trade is a perfectly acceptable and legal business practice.
c. putting new features into old products is a natural part of technological practice.
d. it would discontinue this integration of products, provided a speedy resolution of the government’s
case could be reached.
MSC: Interpretive
CONCLUSION
1. The story of the prisoners’ dilemma shows why

a. predatory pricing is clearly not in society’s best interest.
b. economists are unanimous in condemning resale price maintenance, since it inevitably reduces
competition.
c. oligopolies can fail to act independently, even when independent decision-making is in their best
interest.
d. oligopolies can fail to cooperate, even when cooperation is in their best interest.
NAT: Analytic LOC: Oligopoly TOP: Cooperation | Oligopoly
MSC: Interpretive
TRUE/FALSE
1. The essence of an oligopolistic market is that there are only a few sellers.
ANS: T PTS: 1 DIF: 1 REF: 17-0
NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Definitional
2. Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding
oligopolistic markets.
ANS: F PTS: 1 DIF: 2 REF: 17-0
MSC: Interpretive
3. In a competitive market, strategic interactions among the firms are not important.
NAT: Analytic LOC: Oligopoly TOP: Game theory | Competitive markets
MSC: Interpretive
4. For a firm, strategic interactions with other firms in the market become more important as the number of firms
in the market becomes larger.
MSC: Interpretive
5. Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm
has an incentive to maintain the agreement because the firm’s individual profits will be the greatest under the
cartel arrangement.

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6. When all firms choose their best strategy given the strategies that all the other firms have chosen, the result is
a Nash equilibrium.
MSC: Definitional
7. If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same level
of output as they would produce in a Nash equilibrium.
NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Cooperation
MSC: Interpretive
8. Any market that is served by an oligopoly is in effect served by a monopoly.

9. Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.
10. A group of firms that collude is called a cartel.

11. Oligopolies produce more when they collude then when they do not.
12. Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do
cartels with a larger number of firms.
13. As the number of firms in an oligopoly becomes very large, the price effect disappears.
14. The problems faced by oligopolies with three or more members are entirely different from the problems faced
by duopolies.
NAT: Analytic LOC: Oligopoly TOP: Duopoly | Oligopoly
MSC: Interpretive
15. If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal
to what it would be if the market were a monopoly.
16. In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its current profits
by producing more.
17. As the number of firms in an oligopoly increases, the magnitude of the price effect increases.

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18. If the output effect from increased production is larger than the price effect, then an oligopolist would increase
production.
NAT: Analytic LOC: Oligopoly TOP: Price and output effects
MSC: Interpretive
19. All examples of the prisoner’s dilemma game are characterized by one and only one Nash equilibrium.
NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium | Prisoners' dilemma
MSC: Interpretive
20. If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely to
cooperate than if they play the game only once.
MSC: Interpretive
21. The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain co-
operation among its members.
MSC: Interpretive
22. In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other prisoner
does.
MSC: Interpretive
23. A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by the
other players.
MSC: Definitional
24. In the prisoners' dilemma game, confessing is a dominant strategy for each of the two prisoners.
MSC: Interpretive
25. The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two
prisoners play in the prisoners' dilemma.
MSC: Interpretive
26. In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an undesira-
ble outcome for the firms that are involved.
MSC: Interpretive
27. The decisions of the US and Soviet Union to build nuclear weapons is much like the prisoners’ dilemma.
MSC: Interpretive

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28. In some games, the noncooperative equilibrium is bad for the players and bad for society.
NAT: Analytic LOC: Oligopoly TOP: Game theory | Cooperation
MSC: Interpretive
29. When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both par-
ties to cooperate.
MSC: Interpretive
30. A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does whatever
the other player did last time.
MSC: Definitional
31. The notion of a tit-for-tat strategy applies to a prisoners’ dilemma game that is played repeatedly, but it does
not apply if the game is played only once.
MSC: Interpretive
32. One way that public policy encourages cooperation among oligopolists is through antitrust law.
NAT: Analytic LOC: Oligopoly TOP: Antitrust MSC: Interpretive
33. The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices.
NAT: Analytic LOC: Oligopoly TOP: Sherman Antitrust Act of 1890
MSC: Interpretive
34. The Sherman Antitrust Act states that if a person can prove that he was damaged by an illegal arrangement to
restrain trade, he could sue and recover three times the damages he sustained.
NAT: Analytic LOC: Oligopoly
TOP: Sherman Antitrust Act of 1890 | Clayton Act of 1914 MSC: Interpretive
35. Resale price maintenance prevents retailers from competing on price.

MSC: Interpretive
36. A manufacturer of light bulbs sells its products to retail stores and requires the stores to sell the bulbs to cus-
tomers for $2 per bulb. This practice is known as tying.
MSC: Definitional
37. Some business practices that appear to reduce competition, such as resale price maintenance, may have legiti-
mate economic purposes.
MSC: Interpretive

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38. Tying can be thought of as a form of price discrimination.

39. Tying is always profitable for a monopoly.
40. Regardless of the firm’s behavior, Google should face antitrust legislation because it generates a dominant
share of the revenue in its market.
NAT: Analytic LOC: Oligopoly TOP: Antitrust MSC: Interpretive
41. Policymakers should be aggressive in using their powers to place limits on firm behavior, because business
practices that appear to reduce competition never have any legitimate purposes.
MSC: Interpretive
SHORT ANSWER
1. Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of
the cartel. Why?
ANS:
Individual profits can be increased at the expense of group profits if individuals cheat on the cartel's
cooperative agreement.
PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic
LOC: Oligopoly TOP: Cartels MSC: Interpretive
2. What effect does the number of firms in an oligopoly have on the characteristics of the market?
ANS:
As the number of firms increases, the equilibrium quantity of goods provided increases and price falls; the
market begins to resemble a competitive one.
LOC: Oligopoly TOP: Oligopoly MSC: Analytical
3. Assume that demand for a product that is produced at zero marginal cost is reflected in the table below.
Quantity Price
0 $36
200 $33
400 $30
600 $27
800 $24
1000 $21
1200 $18
1400 $15
1600 $12
1800 $9
2000 $6
2200 $3
2400 $0
a. What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a
cartel?
b. Assume that this market is characterized by a duopoly in which collusive agreements are illegal. What
market price and quantity will be associated with a Nash equilibrium?

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ANS:
a.
Q = 1200
b.
Q = 1600, P = 12
LOC: Oligopoly TOP: Cartels MSC: Applicative
4. Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly.
Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.
ANS:
The source of the tension exists because total profits are maximized when oligopolists cooperate on price and
quantity by operating as a monopolist. However, individual profits can be gained by individuals cheating on
their cooperative agreement. This is why cooperative agreements among members of a cartel are inherently
unstable. This is evident in the problem OPEC experiences in enforcing the cooperative agreement on
production and price of crude oil.
LOC: Oligopoly TOP: Cartels MSC: Interpretive
5. Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oli-
gopoly market. How does this differ from output and price effects in a monopoly market?
ANS:
Output effect: Price > Marginal cost => increased output will add to profit
Price effect: increased quantity is sold at a lower price => lower revenue (profit?)
An oligopolist must take into account how the output and price effects will be influenced by competitors'
production decisions, or it must assume competitors' production will not change in response to its own actions.
LOC: Oligopoly TOP: Profit maximization | Oligopoly MSC: Interpretive
6. Explain how the output effect and the price effect influence the production decision of the individual oligopo-
list.
ANS:
Since the individual oligopolist faces a downward-sloping demand curve, she realizes that if she increases
output, all output must be sold at a lower market price. As such, the revenue from selling the additional units
at the lower market price must exceed the loss in revenue from selling all previous units at the new lower
price. Otherwise, profits will fall as output (production) is increased.
LOC: Oligopoly TOP: Profit maximization | Oligopoly MSC: Interpretive
7. Ford and General Motors are considering expanding into the Vietnamese automobile market. Devise a simple
prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.
ANS:
The answer should present two strategies for each company, such as “Expand” and “Don’t Expand.” To be a
prisoner’s dilemma, each firm needs a dominant strategy, but each firm choosing its dominant strategy results
in an outcome that is jointly worse than if they both chose their other strategy. A possible payoff table with
payoffs (Ford, GM) is
GM
Expand Don’t Expand
Expand (2, 2) (4, 1)
Ford
Don’t Expand (1, 4) (3, 3)
LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative
8. Nike and Reebok (athletic shoe companies) are considering whether to advertise during the Super Bowl. De-
vise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this de-
cision. Does the repeated game scenario differ from a single period game? Is it possible that a repeated game
(without collusive agreements) could lead to an outcome that is better than a single-period game? Explain the
circumstances in which this may be true.

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ANS:
The answer should show that if both shoe companies decide to advertise they will both be worse off than if
they did not. It should also show that each company has the individual incentive to advertise. The dominant
strategy of both companies will be to advertise, regardless of what the other is doing. If the game is repeated
more than once it is possible that the shoe companies will decide not to advertise in the hopes that the other
company adequately understands the mutually beneficial gains that come from not advertising.
LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative
9. Outline the purpose of antitrust laws. What do they accomplish?

ANS:
The purpose of antitrust laws is to move markets toward a competitive equilibrium outcome. These laws are
used to prevent behavior that would lead to excessive market power by any single firm.
LOC: Oligopoly TOP: Antitrust MSC: Interpretive
10. Explain the practice of resale price maintenance and discuss why it is controversial.
ANS:
Resale price maintenance is a requirement by producers that retailers sell their product for a price specified by
the manufacturer. It is controversial because on the surface it appears to limit the ability of retailers to compete
on the basis of price. However, if the manufacturer does not exercise resale price maintenance a free-rider
problem may become evident among the retailers and ultimately lead to lower profits for the manufacturer.
LOC: The role of government TOP: Resale price maintenance
MSC: Interpretive
11. Explain the practice of tying and discuss why it is controversial.

ANS:
Tying is the practice of bundling goods for sale. It is controversial because it is perceived as a tool for
expanding the market power of firms by forcing consumers to purchase additional products. However,
economists are skeptical that a buyer's willingness to pay increases just because two products are bundled
together. In other words, simply bundling two products together doesn't necessarily add any value. It is more
accurately believed to be a form of price discrimination.
LOC: Oligopoly TOP: Tying MSC: Interpretive

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Chapter 17 Test Bank final

Principles of Economics (ESLSCA Business School Paris (Egypt))

Studocu is not sponsored or endorsed by any college or university

1. Which of the following statements about oligopolies is not correct?

3. In general, game theory is the study of

4. Which of the following statements is correct?

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8. We must be knowledgeable of how people behave in strategic situations if we are to understand

9. In an oligopoly, each firm knows that its profits

1. A distinguishing feature of an oligopolistic industry is the tension between

2. In studying oligopolistic markets, economists assume that

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3. The simplest type of oligopoly is

7. Which of the following statements is correct?

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9. As the number of firms in an oligopoly increases, the

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24. Which of the following statements is correct?

25. As the number of firms in an oligopoly increases, the magnitude of the

26. As the number of sellers in an oligopoly becomes very large,

27. In markets characterized by oligopoly,

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55. When an oligopoly market reaches a Nash equilibrium,

57. As a group, oligopolists earn the highest profit when they

58. In order to be successful, a cartel must

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62. The equilibrium quantity in markets characterized by oligopoly is

63. The equilibrium price in a market characterized by oligopoly is

65. As the number of firms in an oligopoly market

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69. Cartels are difficult to maintain because

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75. To increase their individual profits, members of a cartel have an incentive to

76. Once a cartel is formed, the market is in effect served by

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80. In a typical cartel agreement, the cartel maximizes profit when it

81. An oligopolist will increase production if the output effect is

82. As the number of firms in an oligopoly increases,

83. When an oligopoly grows very large, the

84. As the number of firms in an oligopoly increases, the price approaches

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86. Oligopolies would like to act like a

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91. The theory of oligopoly provides a reason why

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96. The more firms an oligopoly has,

97. In an oligopoly, the total output produced in the market is

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Quantity (in gallons) Price Total Revenue

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